SEC Filing | Cass Information Systems, Inc.

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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, 2016

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	(I.R.S. Employer Identification No.)
organization)

12444 Powerscourt Drive, Suite 550	63131
St. Louis, Missouri
(Address of principal executive offices)	(Zip Code)

(314) 506-5500
(Registrant’s telephone number, including area code)
_________________

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 X No _____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes X No _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one)	Large Accelerated Filer _______	Accelerated Filer X

	Non-Accelerated Filer _______ (Do not check if a smaller reporting company)	Smaller Reporting Company _______

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes _____ No X

The number of shares outstanding of the registrant's only class of common stock as of October 26, 2016: Common stock, par value $.50 per share – 11,176,204 shares outstanding.

-1-

TABLE OF CONTENTS

PART I – Financial Information

	Item 1.	FINANCIAL STATEMENTS

		Consolidated Balance Sheets
		September 30, 2016 (unaudited) and December 31, 2015	3

		Consolidated Statements of Income
		Three and nine months ended September 30, 2016 and 2015 (unaudited)	4

		Consolidated Statements of Comprehensive Income
		Three and nine months ended September 30, 2016 and 2015 (unaudited)	5

		Consolidated Statements of Cash Flows
		Nine months ended September 30, 2016 and 2015 (unaudited)	6

		Notes to Consolidated Financial Statements (unaudited)	7

	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
		AND RESULTS OF OPERATIONS	16

	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

	Item 4.	CONTROLS AND PROCEDURES	28

PART II – Other Information – Items 1. – 6.			28

	SIGNATURES		30

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 2015 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,
	2016			December 31,
	(Unaudited)			2015
Assets
Cash and due from banks	$	13,437		$	9,015
Interest-bearing deposits in other financial institutions		117,789			176,405
Federal funds sold and other short-term investments		171,877			67,752
Cash and cash equivalents		303,103			253,172
Securities available-for-sale, at fair value		382,671			375,696

Loans		684,874			659,055
Less: Allowance for loan losses		10,673			11,635
Loans, net		674,201			647,420
Premises and equipment, net		20,776			19,648
Investment in bank-owned life insurance		16,319			15,933
Payments in excess of funding		111,334			105,526
Goodwill		11,590			11,590
Other intangible assets, net		2,099			2,405
Other assets		25,560			24,116
Total assets	$	1,547,653		$	1,455,506

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	202,384		$	181,823
Interest-bearing		421,629			464,661
Total deposits		624,013			646,484
Accounts and drafts payable		682,762			577,259
Other liabilities		28,566			24,385
Total liabilities		1,335,341			1,248,128

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 11,931,147 shares issued at September 30,
2016 and December 31, 2015		5,966			5,966
Additional paid-in capital		126,016			126,290
Retained earnings		114,513			103,994
Common shares in treasury, at cost (755,405 shares at September 30,
2016 and 598,875 shares at December 31, 2015)		(30,460	)		(22,208	)
Accumulated other comprehensive loss		(3,723	)		(6,664	)
Total shareholders’ equity		212,312			207,378
Total liabilities and shareholders’ equity	$	1,547,653		$	1,455,506

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				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016			2015
Fee Revenue and Other Income:
Information services payment and processing	$	21,737	$	19,781	$	62,162		$	58,898
revenue
Bank service fees		284		308		931			908
Gains on sales of securities		—		1,271		387			2,910
Other		127		154		630			468
Total fee revenue and other income		22,148		21,514		64,110			63,184

Interest Income:
Interest and fees on loans		7,264		7,086		21,711			21,528
Interest and dividends on securities:
Taxable		36		5		69			20
Exempt from federal income taxes		2,386		2,371		7,217			6,996
Interest on federal funds sold and
other short-term investments		299		119		775			392
Total interest income		9,985		9,581		29,772			28,936

Interest Expense:
Interest on deposits		505		498		1,522			1,610
Net interest income		9,480		9,083		28,250			27,326
Provision for loan losses		—		—		(1,000	)		—
Net interest income after provision for
loan losses		9,480		9,083		29,250			27,326
Total net revenue		31,628		30,597		93,360			90,510

Operating Expense:
Personnel		18,319		17,761		54,267			52,630
Occupancy		860		872		2,560			2,565
Equipment		1,124		1,067		3,289			3,208
Amortization of intangible assets		101		103		305			306
Other operating expense		3,147		2,831		9,105			8,873
Total operating expense		23,551		22,634		69,526			67,582
Income before income tax expense		8,077		7,963		23,834			22,928
Income tax expense		1,855		2,083		5,910			5,961
Net income	$	6,222	$	5,880	$	17,924		$	16,967

Basic earnings per share	$	.56	$	.52	$	1.61		$	1.49
Diluted earnings per share		.55		.51		1.58			1.47

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						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Comprehensive income:
Net income	$	6,222		$	5,880		$	17,924		$	16,967
Other comprehensive income:
Net unrealized gain (loss) on securities
available-for-sale		(3,176	)		3,301			5,036			(327	)
Tax effect		1,180			(1,226	)		(1,871	)		122

Reclassification adjustments for gains
included in net income		—			(1,271	)		(387	)		(2,910	)
Tax effect		—			472			143			1,081

Foreign currency translation adjustments		9			2			20			(69	)
Total comprehensive income	$	4,235		$	7,158		$	20,865		$	14,864

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,
	2016			2015
Cash Flows From Operating Activities:
Net income	$	17,924		$	16,967
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		6,964			6,476
Net gains on sales of securities		(387	)		(2,910	)
Stock-based compensation expense		1,471			1,543
Provision for loan losses		(1,000	)		—
Increase in income tax benefit		(121	)		(1,156	)
Increase in income tax liability		973			1,513
Increase in pension liability		3,102			3,626
Other operating activities, net		(3,311	)		(254	)
Net cash provided by operating activities		25,615			25,805

Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale		21,491			99,347
Proceeds from maturities of securities available-for-sale		29,970			31,390
Purchase of securities available-for-sale		(57,637	)		(142,014	)
Net increase in loans		(25,781	)		(1,508	)
Net (increase) decrease in payments in excess of funding		(5,808	)		11,368
Purchases of premises and equipment, net		(3,549	)		(4,320	)
Net cash used in investing activities		(41,314	)		(5,737	)

Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits		20,561			13,938
Net decrease in interest-bearing demand and savings deposits		(37,855	)		(41,054	)
Net decrease in time deposits		(5,177	)		(13,611	)
Net increase (decrease) in accounts and drafts payable		105,503			(30,198	)
Cash dividends paid		(7,406	)		(7,203	)
Purchase of common shares for treasury		(9,217	)		(9,426	)
Other financing activities, net		(779	)		(767	)
Net cash provided by (used in) financing activities		65,630			(88,321	)
Net increase (decrease) in cash and cash equivalents		49,931			(68,253	)
Cash and cash equivalents at beginning of period		253,172			294,335
Cash and cash equivalents at end of period	$	303,103		$	226,082

Supplemental information:
Cash paid for interest	$	1,517		$	3,313
Cash paid for income taxes		5,128			4,501

See accompanying notes to unaudited consolidated financial statements.

-6-

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. 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, 2015.

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 and those with finite useful lives be amortized over their useful lives.

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

	September 30, 2016					December 31, 2015
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
*(In thousands)*	Amount		Amortization			Amount		Amortization
Assets eligible for amortization:
Customer lists	$	3,933	$	(2,262	)	$	3,933	$	(2,023	)
Patents		72		(7	)		72		(4	)
Non-compete agreements		261		(248	)		261		(209	)
Software		234		(234	)		234		(234	)
Other		500		(150	)		500		(125	)
Unamortized intangible assets:
Goodwill¹		11,817		(227	)		11,817		(227	)
Total intangible assets	$	16,817	$	(3,128	)	$	16,817	$	(2,822	)
¹Amortization through December 31, 2001 prior to adoption of FASB ASC 350.

The customer lists are amortized over seven and ten years; the patents over 18 years; the non-compete agreements over five years; software over three years; and other intangible assets over fifteen years. Amortization of intangible assets amounted to $305,000 and $306,000 for the nine-month periods ended September 30, 2016 and 2015, respectively. Estimated annual amortization of intangibles is as follows: $408,000 in 2016, and $356,000 in each of 2017, 2018, 2019 and 2020.

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. There were no anti-dilutive shares in the nine months ended September 30, 2016 and 2015. The calculations of basic and diluted earnings per share are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
*(In thousands except share and per share data)*	2016		2015		2016		2015
Basic
Net income	$	6,222	$	5,880	$	17,924	$	16,967
Weighted-average common shares
outstanding		11,110,824		11,329,002		11,159,469		11,385,680
Basic earnings per share	$	.56	$	.52	$	1.61	$	1.49

Diluted
Net income	$	6,222	$	5,880	$	17,924	$	16,967
Weighted-average common shares
outstanding		11,110,824		11,329,002		11,159,469		11,385,680
Effect of dilutive restricted stock
and stock appreciation rights		158,541		158,177		155,112		161,005
Weighted-average common shares
outstanding assuming dilution
assuming dilution		11,269,365		11,487,179		11,314,581		11,546,685
Diluted earnings per share	$	.55	$	.51	$	1.58	$	1.47

-7-

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. As restored by the Board of Directors on October 19, 2015, the program provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date. The Company repurchased 0 and 68,105 shares during the three-month periods and 187,123 and 192,690 during the nine-month periods ended September 30, 2016 and 2015, respectively. As of September 30, 2016, 301,156 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. On October 17, 2016, the Company’s Board of Directors restored the repurchase program to 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, processing and capital 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 churches.

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, 2015. Management evaluates segment performance based on net income after allocations for corporate expenses and income taxes. 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.

Assets represent actual assets owned by Information Services and Banking Services and there is no allocation methodology used. Segment interest from customers is the actual interest earned on the loans owned by Information Services and Banking Services, respectively.

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

					Corporate,
	Information		Banking		Eliminations
*(In thousands)*	Services		Services		and Other			Total
Three Months Ended September 30, 2016
Fee revenue and other income:
Income from customers	$	25,090	$	6,538	$	—		$	31,628
Intersegment income (expense)		2,797		416		(3,213	)		—
Net income		3,806		2,416		—			6,222
Goodwill		11,454		136		—			11,590
Other intangible assets, net		2,099		—		—			2,099
Total assets		808,568		742,933		(3,848	)		1,547,653
Three Months Ended September 30, 2015
Fee revenue and other income
Income from customers	$	24,694	$	5,903	$	—		$	30,597
Intersegment income (expense)		2,310		410		(2,720	)		—

-8-

Net income		3,961		1,919		—			5,880
Goodwill		11,454		136		—			11,590
Other intangible assets, net		2,507		—		—			2,507
Total assets		751,264		713,173		(30,917	)		1,433,520
Nine Months Ended September 30, 2016
Fee revenue and other income:
Income from customers	$	73,084	$	20,276	$	—		$	93,360
Intersegment income (expense)		8,870		1,195		(10,065	)		—
Net income		10,231		7,693		—			17,924
Goodwill		11,454		136		—			11,590
Other intangible assets, net		2,099		—		—			2,099
Total assets		808,568		742,933		(3,848	)		1,547,653
Nine Months Ended September 30, 2015
Fee revenue and other income
Income from customers	$	73,120	$	17,390	$	—		$	90,510
Intersegment income (expense)		6,854		1,266		(8,120	)		—
Net income		11,368		5,599		—			16,967
Goodwill		11,454		136		—			11,590
Other intangible assets, net		2,507		—		—			2,507
Total assets		751,264		713,173		(30,917	)		1,433,520

Note 6 – Loans by Type

A summary of loan categories is as follows:

	September 30,		December 31,
*(In thousands)*	2016		2015
Commercial and industrial	$	213,060	$	193,430
Real estate
Commercial:
Mortgage		102,569		108,836
Construction		13,704		1,182
Church, church-related:
Mortgage		322,800		306,728
Construction		15,094		28,957
Industrial Revenue Bonds		17,390		19,831
Other		257		91
Total loans	$	684,874	$	659,055

The following table presents the aging of loans by loan categories at September 30, 2016 and December 31, 2015:

	Performing						Nonperforming
							90 Days
			30-59		60-89		and		Non-		Total
*(In thousands)*	Current		Days		Days		Over		accrual		Loans
September 30, 2016
Commercial and industrial	$	213,060	$	—	$	—	$	—	$	—	$	213,060
Real estate
Commercial:
Mortgage		102,309		—		—		—		260		102,569
Construction		13,704		—		—		—		—		13,704
Church, church-related:
Mortgage		321,631		105		—		984		80		322,800
Construction		15,094		—		—		—		—		15,094
Industrial Revenue Bonds		17,390		—		—		—		—		17,390
Other		257		—		—		—		—		257
Total	$	683,445	$	105	$	—	$	984	$	340	$	684,874
December 31, 2015
Commercial and industrial	$	193,430	$	—	$	—	$	—	$	—	$	193,430
Real estate
Commercial:
Mortgage		105,804		—		—		—		3,032		108,836
Construction		1,182		—		—		—		—		1,182
Church, church-related:
Mortgage		306,625		—		—		—		103		306,728
Construction		28,957		—		—		—		—		28,957
Industrial Revenue Bonds		19,831		—		—		—		—		19,831
Other		91		—		—		—		—		91
Total	$	655,920	$	—	$	—	$	—	$	3,135	$	659,055

-9-

The following table presents the credit exposure of the loan portfolio as of September 30, 2016 and December 31, 2015:

	Loans		Performing		Nonperforming
	Subject to		Loans Subject to		Loans Subject
	Normal		Special		to Special
*(In thousands)*	Monitoring¹		Monitoring²		Monitoring²		Total Loans
September 30, 2016
Commercial and industrial	$	210,824	$	2,236	$	—	$	213,060
Real estate
Commercial:
Mortgage		101,238		1,071		260		102,569
Construction		13,704		—		—		13,704
Church, church-related:
Mortgage		315,516		7,204		80		322,800
Construction		15,094		—		—		15,094
Industrial Revenue Bonds		17,390		—		—		17,390
Other		257		—		—		257
Total	$	674,023	$	10,511	$	340	$	684,874
December 31, 2015
Commercial and industrial	$	190,303	$	3,127	$	—	$	193,430
Real estate
Commercial:
Mortgage		104,642		1,162		3,032		108,836
Construction		1,182		—		—		1,182
Church, church-related:
Mortgage		299,135		7,490		103		306,728
Construction		28,957		—		—		28,957
Industrial Revenue Bonds		19,831		—		—		19,831
Other		91		—		—		91
Total	$	644,141	$	11,779	$	3,135	$	659,055

¹Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligations.
²Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention.

Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled debt restructurings, both performing and nonperforming. Troubled debt restructuring involves the granting of a concession to a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment schedule or interest rate. Management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses.” At September 30, 2016, impaired loans were evaluated using the expected cash flow method. At December 31, 2015, all impaired loans were evaluated based on the fair value of the collateral and the expected cash flow method. The fair value of the collateral is based upon an observable market price or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 3. One loan was delinquent 90 days and still accruing interest at September 30, 2016, which was brought current on October 4, 2016 and has a sale contract that will pay the loan in full upon closing. Therefore, it is not considered impaired. There were no loans delinquent 90 days or more and still accruing interest at December 31, 2015. There were no loans classified as troubled debt restructuring at September 30, 2016 and December 31, 2015.

There were no foreclosed loans recorded as other real estate owned (included in other assets) as of September 30, 2016 and December 31, 2015.

-10-

The following table presents the recorded investment and unpaid principal balance for impaired loans at September 30, 2016 and December 31, 2015:

			Unpaid		Related
	Recorded		Principal		Allowance for
*(In thousands)*	Investment		Balance		Loan Losses
September 30, 2016
Commercial and industrial:
Nonaccrual	$	—	$	—	$	—
Real estate
Commercial – Mortgage:
Nonaccrual		260		260		—
Church – Mortgage:
Nonaccrual		80		80		80
Total impaired loans	$	340	$	340	$	80
December 31, 2015
Commercial and industrial:
Nonaccrual	$	—	$	—	$	—
Real estate
Commercial – Mortgage:
Nonaccrual		3,032		3,032		1,039
Church – Mortgage:
Nonaccrual		103		103		103
Total impaired loans	$	3,135	$	3,135	$	1,142

A summary of the activity in the allowance for loan losses from December 31, 2015 to September 30, 2016 is as follows:

	December 31,		Charge-							September 30,
*(In thousands)*	2015		Offs		Recoveries		Provision			2016
Commercial and industrial	$	3,083	$	—	$	38	$	217		$	3,338
Real estate
Commercial:
Mortgage		2,803		—		—		(1,179	)		1,624
Construction		9		—		—		93			102
Church, church-related:
Mortgage		4,082		—		—		48			4,130
Construction		217		—		—		(102	)		115
Industrial Revenue Bonds		320		—		—		(47	)		273
Other		1,121		—		—		(30	)		1,091
Total	$	11,635	$	—	$	38	$	(1,000	)	$	10,673

A summary of the activity in the allowance for loan losses from December 31, 2014 to September 30, 2015 is as follows:

	December 31,		Charge-							September 30,
*(In thousands)*	2014		Offs		Recoveries		Provision			2015
Commercial and industrial	$	3,515	$	30	$	10	$	(133	)	$	3,362
Real estate
Commercial:
Mortgage		3,060		—		5		(3	)		3,062
Construction		—		—		—		1			1
Church, church-related:
Mortgage		4,016		—		2		127			4,145
Construction		140		—		—		10			150
Industrial Revenue Bonds		394		—		—		(50	)		344
Other		769		—		1		48			818
Total	$	11,894	$	30	$	18	$	0		$	11,882

Note 7 – Commitments and Contingencies

In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. 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 September 30, 2016 and December 31, 2015, no amounts have been accrued for any estimated losses for these instruments.

-11-

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The balance of unused loan commitments, standby and commercial letters of credit were $15,976,000, $14,238,000, and $1,820,000 at September 30, 2016 and were $11,755,000, $11,581,000, and $1,857,000 at December 31, 2015, 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 guarantees on these financial instruments.

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at September 30, 2016:

	Amount of Commitment Expiration per Period
			Less than		1-3		3-5		Over 5
*(In thousands)*	Total		1 Year		Years		Years		Years
Operating lease commitments	$	6,119	$	1,416	$	2,192	$	1,605	$	906
Time deposits		56,523		49,340		4,967		2,216		—
Total	$	62,642	$	50,756	$	7,159	$	3,821	$	906

The Company and its subsidiaries are involved in various pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate resolution of these legal actions and proceedings will not have a material effect upon the Company’s consolidated financial position or results of operations.

Note 8 – Stock-Based Compensation

The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) permits the issuance of up to 1,500,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and performance awards. The Company issues shares out of treasury stock for these awards. During the nine months ended September 30, 2016, 35,330 restricted shares and 0 SARs were granted under the Omnibus Plan.

Restricted Stock
Restricted shares granted prior to April 16, 2013 are amortized to expense over a three-year vesting period. Beginning on April 16, 2013, restricted shares granted to Company employees are amortized to expense over a three-year vesting period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned. As of September 30, 2016, the total unrecognized compensation expense related to non-vested restricted shares was $2,120,000, and the related weighted-average period over which it is expected to be recognized is approximately .8 years.

Following is a summary of the activity of the restricted stock:

	Nine Months Ended
	September 30, 2016
	Shares		Fair Value
Balance at December 31, 2015	69,041		$	51.33
Granted	35,330		$	50.02
Vested	(29,268	)	$	50.89
Forfeited	(765	)	$	51.87
Balance at September 30, 2016	74,338		$	50.87

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SARs

SARs vest over a three-year period, with one-third of the shares vesting and becoming exercisable each year on the anniversary date of the grant, and they expire 10 years from the original grant date. As of September 30, 2016, the total unrecognized compensation expense was $74,000, and the related weighted-average period over which it is expected to be recognized is 0.3 years. Following is a summary of the activity of the Company’s SARs program for the nine-month period ended September 30, 2016:

			Weighted-		Average	Aggregate
			Average		Remaining	Intrinsic
			Exercise		Contractual	Value
	Shares		Price		Term Years	*(In thousands)*
Outstanding at December 31, 2015	307,323		$	36.57	5.99	$	4,577
Exercised	(32,391	)	$	33.48
Outstanding at September 30, 2016	274,932		$	36.93	5.27	$	5,421
Exercisable at September 30, 2016	262,768		$	35.79	5.17	$	5,482

Following is a summary of the activity of the non-vested SARs during the nine-month period ended September 30, 2016:

			Weighted-Average
	Shares		Grant Date Fair Value
Non-vested at December 31, 2015	52,507		$	51.17
Vested	(40,343	)	$	48.02
Non-vested at September 30, 2016	12,164		$	61.64

Note 9 – Defined Pension Plans

The Company has a noncontributory defined-benefit pension plan, which covers most of its employees. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs for 2015 and an estimate for 2016:

	Estimated			Actual
*(In thousands)*	2016			2015
Service cost – benefits earned during the year	$	3,559		$	3,796
Interest cost on projected benefit obligations		3,504			3,178
Expected return on plan assets		(4,734	)		(4,864	)
Net amortization and deferral		1,259			1,542
Net periodic pension cost	$	3,588		$	3,652

Pension costs recorded to expense were $965,000 and $1,010,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and totaled $2,724,000 and $2,978,000 for the nine-month periods ended September 30, 2016 and 2015, respectively. Pension costs decreased in 2016 due to an increase in the discount rate assumption and the use of the updated mortality tables. The Company made no contribution to the plan during the nine-month period ended September 30, 2016 and is evaluating the amount of additional contributions, if any, in the remainder of 2016.

In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan. The following table represents the components of the net periodic pension costs for 2015 and an estimate for 2016:

	Estimated		Actual
*(In thousands)*	2016		2015
Service cost – benefits earned during the year	$	133	$	140
Interest cost on projected benefit obligation		367		348
Net amortization		295		654
Net periodic pension cost	$	795	$	1,142

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Pension costs recorded to expense were $201,000 and $286,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and were $604,000 and $857,000 for the nine-month periods ended September 30, 2016 and 2015, respectively.

Note 10 – Income Taxes

As of September 30, 2016, the Company’s unrecognized tax benefits were approximately $1,503,000, of which $1,124,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2015, the Company’s unrecognized tax benefits were approximately $1,194,000, of which $861,000 would, if recognized, affect the Company’s effective tax rate. During the next 12 months, the Company may realize a reduction of its unrecognized tax benefits of approximately $374,000 due to the lapse of federal and state statutes of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company had $86,000 and $54,000 of gross interest accrued as of September 30, 2016 and December 31, 2015, respectively. There were no penalties for unrecognized tax benefits accrued at September 30, 2016 and December 31, 2015.

The Company is subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions. U.S. federal income tax returns for tax years 2012 through 2015 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2012 through 2015.

Note 11 – Investment in Securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore fall into the Level 2 category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:

	September 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
*(In thousands)*	Cost		Gains		Losses		Fair Value
State and political subdivisions	$	348,829	$	17,350	$	174	$	366,005
U.S. government agencies		8,159		12		1		8,170
Certificates of deposit		8,496		—		—		8,496
Total	$	365,484	$	17,362	$	175	$	382,671

	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
*(In thousands)*	Cost		Gains		Losses		Fair Value
State and political subdivisions	$	356,531	$	12,552	$	13	$	369,070
Certificates of deposit		6,626		—		—		6,626
Total	$	363,157	$	12,552	$	13	$	375,696

The fair values of securities with unrealized losses are as follows:

	September 30, 2016
	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
*(In thousands)*	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
State and political	$	19,000	$	174	$	—	$	—	$	19,000	$	174
subdivisions
U.S. government agencies		3,095		1		—		—		3,095		1
Certificates of deposit		—		—		—		—		—		—
Total	$	22,095	$	175	$	—	$	—	$	22,095	$	175

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	December 31, 2015
	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
*(In thousands)*	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
State and political	$	3,638	$	5	$	1,208	$	8	$	4,846	$	13
subdivisions
Certificates of deposit		—		—		—		—		—		—
Total	$	3,638	$	5	$	1,208	$	8	$	4,846	$	13

There were 16 securities, or 5% of the total (none greater than 12 months), in an unrealized loss position as of September 30, 2016. There were 5 securities, or 1% of the total (1 greater than 12 months), in an unrealized loss position as of December 31, 2015. All unrealized losses were reviewed to determine whether the losses were other than temporary. Management believes that all unrealized losses are temporary since they were market driven, and it is more likely than not that the Company will not be required to sell prior to recovery of the amortized basis.

The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

	September 30, 2016
*(In thousands)*	Amortized Cost		Fair Value
Due in 1 year or less	$	36,857	$	37,215
Due after 1 year through 5 years		56,860		58,725
Due after 5 years through 10 years		146,015		155,834
Due after 10 years		125,752		130,897
Total	$	365,484	$	382,671

Proceeds from sales of investment securities classified as available for sale were $0 and $33,395,000 for the three months ended September 30, 2016 and 2015, respectively, and were $21,491,000 and $99,347,000 for the nine months ended September 30, 2016 and 2015, respectively. Gross realized gains were $0 and $1,271,000 for the three months ended September 30, 2016 and 2015, respectively, and were $387,000 and $2,910,000 for the nine months ended September 30, 2016 and 2015, respectively. There was one security totaling $3,750,000 pledged to secure public deposits and for other purposes at September 30, 2016.

Note 12 – Fair Value of Financial Instruments

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:

	September 30, 2016				December 31, 2015
	Carrying				Carrying
*(In thousands)*	Amount		Fair Value		Amount		Fair Value
Balance sheet assets:
Cash and cash equivalents	$	303,103	$	303,103	$	253,172	$	253,172
Investment securities		382,671		382,671		375,696		375,696
Loans, net		674,201		678,185		647,420		649,161
Accrued interest receivable		5,498		5,498		6,647		6,647
Total	$	1,365,473	$	1,369,457	$	1,282,935	$	1,284,676
Balance sheet liabilities:
Deposits	$	624,013	$	624,367	$	646,484	$	646,892
Accounts and drafts payable		682,762		682,762		577,259		577,259
Accrued interest payable		40		40		35		35
Total	$	1,306,815	$	1,307,169	$	1,223,778	$	1,224,186

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents – The carrying amount approximates fair value.

-15-

Investment in Securities – The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 11, “Investment in Securities,” for fair value and unrealized gains and losses by investment type.

Loans – The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses result in a fair valuation.

Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or a current appraised value and therefore, the fair value is a nonrecurring Level 3 valuation.

Accrued Interest Receivable – The carrying amount approximates fair value.

Deposits – The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits.

Accounts and Drafts Payable – The carrying amount approximates fair value.

Accrued Interest – The carrying amount approximates fair value.

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the nine months ended September 30, 2016 and 2015. No financial instruments are measured using Level 3 inputs for the nine months ended September 30, 2016 and 2015.

Note 13 – Subsequent Events

In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events after the consolidated balance sheet date of September 30, 2016, and there were no events identified that would require additional disclosures to prevent the Company’s unaudited consolidated financial statements from being misleading.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, and Breda, Netherlands. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy invoices, which include electricity and gas as well as environmental and telecommunications expense and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from transportation, energy, telecommunication and environmental invoices, assisting its customers’ transportation, energy, environmental and information technology managers in making decisions that will enable them to improve operating performance. The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers. It then provides the data in a central repository for access and archiving. The data is finally transformed into information through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical processing. The Company also, through Cass Commercial Bank, its St. Louis, Missouri-based bank subsidiary provides banking services in the St. Louis metropolitan, Orange County, California, Colorado Springs, Colorado, and other selected cities in the United States. In addition to supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-related ministries.

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The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, 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,” in the Company’s 2015 Annual Report on Form 10-K, 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.

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.

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board (“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. Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.

Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly, the Company expects to continue to utilize the present processes.

Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns such as the realization of deferred tax assets or changes in tax laws or interpretations thereof. In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other taxing authorities. In accordance with FASB ASC 740, “Income Taxes,” the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 10 to the unaudited consolidated financial statements contained herein.

-17-

Pension Plans. The amounts recognized in the unaudited consolidated financial statements related to pension plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2015, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 10 to the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Pursuant to FASB ASC 715, “Compensation – Retirement Benefits,” the Company has recognized the funded status of its defined benefit postretirement plan in its balance sheet and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended September 30, 2016 (“Third Quarter of 2016”) compared to the three-month period ended September 30, 2015 (“Third Quarter of 2015”) and the nine-month period ended September 30, 2016 (“Nine Months Ended 2016”) compared to the nine-month period ended September 30, 2015 (“Nine Months Ended 2015”). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 2015 Annual Report on Form 10-K. Results of operations for the Third Quarter of 2016 are not necessarily indicative of the results to be attained for any other period.

Net Income

The following table summarizes the Company’s operating results:

	Third Quarter of							Nine Months Ended
							%							%
*(In thousands except per share data)*	2016			2015			Change	2016			2015			Change
Net income	$	6,222		$	5,880		5.8	$	17,924		$	16,967		5.6
Diluted earnings per share	$	.55		$	.51		7.8	$	1.58		$	1.47		7.5
Return on average assets		1.59	%		1.63	%	—		1.60	%		1.58	%	—
Return on average equity		11.84	%		11.86	%	—		11.56	%		11.48	%	—

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 and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income. Processing volumes, fee revenue, and other income were as follows:

	Third Quarter of						Nine Months Ended
					%						%
*(In thousands)*	2016		2015		Change		2016		2015		Change
Transportation invoice transaction
volume		8,898		8,626	3.2	%		25,786		25,720	0.3	%
Transportation invoice dollar
volume	$	5,864,716	$	6,140,747	(4.5	)%	$	17,107,723	$	18,739,375	(8.7	)%
Expense management
transaction volume*		6,034		5,202	16.0	%		16,989		15,264	11.3	%
Expense management dollar
volume*	$	3,301,049	$	3,162,787	4.4	%	$	8,882,181	$	8,901,907	(0.2	)%
Payment and processing revenue	$	21,737	$	19,781	9.9	%	$	62,162	$	58,898	5.5	%
*Includes energy, telecom and waste

Third Quarter of 2016 compared to Third Quarter of 2015:

In the transportation market, new accounts boosted transaction volume, but multiple factors continued to challenge dollar volume growth. A continuing impediment was declining activity from existing customers, especially those involved in oil and gas production. Transportation sector dollar volume was also retarded by lower fuel prices which reduced average invoice amounts. The expense management group had 16.0% growth in transaction volume. New customer acquisition, including several large accounts that switched from competitors, was the primary driver of the increase. Expense management dollar volume was also up for the quarter.

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There were no gains on sales of securities in the Third Quarter of 2016, compared to $1,271,000 in the Third Quarter of 2015.

Nine Months Ended 2016 compared to Nine Months Ended 2015:

Transportation transaction and dollar volumes as well as expense management transaction volumes fluctuated for the same reasons as the Second Quarter. Expense management dollar volume decreased due to a change in the mix of its customer base.

There were $387,000 of gains on sales of securities in the Nine Months Ended 2016, compared to $2,910,000 in the Nine Months Ended 2015.

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:

	Third Quarter of								Nine Months Ended
							%								%
*(In thousands)*	2016			2015			Change		2016			2015			Change
Average earnings assets	$	1,351,638		$	1,234,469		9.5	%	$	1,301,280		$	1,235,403		5.3	%
Average interest-bearing
liabilities		428,797			396,230		8.2	%		426,825			416,992		2.4	%
Net interest income*		10,842			10,444		3.8	%		32,370			31,347		3.3	%
Net interest margin*		3.19	%		3.36	%				3.32	%		3.39	%
Yield on earning assets*		3.34	%		3.52	%				3.48	%		3.57	%
Rate on interest-bearing liabilities		.47	%		.50	%				.48	%		.52	%
*Presented on a tax-equivalent basis assuming a tax rate of 35%.

Third Quarter of 2016 compared to Third Quarter of 2015:

Third Quarter of 2016 average earning assets increased $117,169,000, or 9.5%, compared to the same period in the prior year (see discussion in the following paragraphs).

Average federal funds sold and other short-term investments increased $62,777,000, or 51.1%, average interest bearing deposits in other financial institutions increased $20,600,000, or 19.3%, total average loans increased $15,919,000, or 2.4%, and average investment securities increased $13,497,000, or 4.0%, for the Third Quarter of 2016 as compared to the Third Quarter of 2015. This was due to an increase in deposits (see discussion in following paragraph) and accounts and drafts payable balances.

Total average interest-bearing liabilities for the Third Quarter of 2016 increased $32,567,000, or 8.2%, average accounts and drafts payable increased $48,287,000, or 7.5%, and average demand deposits increased $33,022,000, or 20.6%, for the Third Quarter of 2016.

Net interest margin and yield on earning assets decreased due to a less favorable mix of earning assets in the Third Quarter of 2016. However, the 9.5% increase in the volume of earning assets more than offset the decrease in yield and resulted in a 3.8% increase in net interest income.

Nine Months Ended 2016 compared to Nine Months Ended 2015:

Nine Months Ended 2016 average earning assets increased $65,877,000, or 5.3%, compared to the same period in the prior year (see following discussion).

Average federal funds sold increased $33,341,000, or 31.7%, for the Nine Months Ended 2016 as compared to the Nine Months Ended 2015. Average investment securities increased $24,371,000, or 7.6%, as the Company took advantage of market opportunities.

-19-

Total average interest-bearing liabilities for the Nine Months Ended 2016 decreased $9,833,000, or 2.4%, compared to the Nine Months Ended 2015. Average demand deposits increased $27,921,000, or 17.5%, and average accounts and drafts payable increased $19,648,000, or 3.1%.

Net interest margin and yield on earning assets decreased slightly, however, the 5.3% increase in the volume of earning assets more than offset the slight decrease in yield and resulted in a 3.3% increase in net interest income.

For more information on the changes in net interest income, please refer to the tables that follow.

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential

The following tables show the 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.

-20-

	Third Quarter of 2016							Third Quarter of 2015
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
*(In thousands)*	Balance			Expense		Rate		Balance			Expense		Rate
Assets¹
Earning assets
Loans^{2, 3}:
Taxable	$	664,705		$	7,121	4.26	%	$	645,269		$	6,931	4.26	%
Tax-exempt⁴		17,703			219	4.92			21,220			239	4.47
Investment securities⁵:
Taxable		5,714			22	1.53			1,189			1	.33
Tax-exempt⁴		342,305			3,672	4.27			333,333			3,648	4.34
Certificates of deposit		8,339			14	.67			3,963			4	.40
Interest-bearing deposits in
other financial institutions		127,314			162	.51			106,714			80	.30
Federal funds sold and other
short-term investments		185,558			137	.29			122,781			39	.13
Total earning assets		1,351,638			11,347	3.34			1,234,469			10,942	3.52
Non-earning assets
Cash and due from banks		12,097							14,007
Premises and equipment, net		20,773							18,960
Bank-owned life insurance		16,238							15,725
Goodwill and other
intangibles		13,749							14,150
Other assets		148,734							142,730
Allowance for loan losses		(10,673	)						(11,905	)
Total assets	$	1,552,556						$	1,428,136
Liabilities and Shareholders’ Equity¹
Interest-bearing liabilities
Interest-bearing demand
deposits	$	351,971		$	347	.39	%	$	315,755		$	329	.41	%
Savings deposits		19,679			24	.49			13,225			15	.45
Time deposits >= $100		22,237			69	1.23			24,559			76	1.23
Other time deposits		34,899			65	.74			42,680			78	.73
Federal Funds purchased		11			—	—			11			—	—
Total interest-bearing		428,797			505	.47			396,230			498	.50
liabilities
Non-interest bearing liabilities
Demand deposits		193,688							160,666
Accounts and drafts payable		692,545							644,258
Other liabilities		28,456							30,228
Total liabilities		1,343,486							1,231,382
Shareholders’ equity		209,070							196,754
Total liabilities and
shareholders’ equity	$	1,552,556						$	1,428,136
Net interest income				$	10,842						$	10,444
Net interest margin						3.19	%						3.36	%
Interest spread						2.87							3.02

1.	Balances shown are daily averages.
2.	For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s 2015 consolidated financial statements, filed with the Company’s 2015 Annual Report on Form 10-K.
3.	Interest income on loans includes net loan fees of $76,000 and $73,000 for the Third Quarter of 2016 and 2015, respectively.
4.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $1,361,000 and $1,361,000 for the Third Quarter of 2016 and 2015, respectively.
5.	For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

-21-

	Nine Months Ended 2016							Nine Months Ended 2015
				Interest							Interest
	Average			Income/		Yield/		Average			Income/		Yield/
*(In thousands)*	Balance			Expense		Rate		Balance			Expense		Rate
Assets¹
Earning assets
Loans^{2, 3}:
Taxable	$	661,435		$	21,278	4.30	%	$	652,326		$	21,057	4.32	%
Tax-exempt⁴		18,517			666	4.80			22,025			725	4.40
Investment securities⁵:
Taxable		2,711			33	1.63			1,160			12	1.38
Tax-exempt⁴		343,052			11,104	4.32			320,232			10,763	4.49
Certificates of deposit		7,626			36	.63			3,822			8	.28
Interest-bearing deposits in
other financial institutions		129,457			484	.50			130,697			290	.30
Federal funds sold and other
short-term investments		138,482			291	.28			105,141			102	.13
Total earning assets		1,301,280			33,892	3.48			1,235,403			32,957	3.57
Non-earning assets
Cash and due from banks		11,716							13,438
Premises and equipment, net		20,371							18,234
Bank-owned life insurance		16,110							15,603
Goodwill and other
intangibles		13,851							14,232
Other assets		144,129							146,784
Allowance for loan losses		(10,981	)						(11,901	)
Total assets	$	1,496,476						$	1,431,793
Liabilities and Shareholders’ Equity¹
Interest-bearing liabilities
Interest-bearing demand
deposits	$	348,221		$	1,043	.40	%	$	329,689		$	1,052	.43	%
Savings deposits		18,756			68	.48			14,973			50	.45
Time deposits >= $100		22,425			201	1.20			25,484			238	1.25
Other time deposits		37,423			210	.75			46,839			270	.77
Federal Funds purchased		—			—	—			7			—	—
Total interest-bearing liabilities		426,825			1,522	.48			416,992			1,610	.52
Non-interest bearing liabilities
Demand deposits		187,339							159,418
Accounts and drafts payable		648,681							629,033
Other liabilities		26,475							28,724
Total liabilities		1,289,320							1,234,167
Shareholders’ equity		207,156							197,626
Total liabilities and
shareholders’ equity	$	1,496,476						$	1,431,793
Net interest income				$	32,370						$	31,347
Net interest margin						3.32	%						3.39	%
Interest spread						3.00							3.05

1.	Balances shown are daily averages.
2.	For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s 2015 consolidated financial statements, filed with the Company’s 2015 Annual Report on Form 10-K.
3.	Interest income on loans includes net loan fees of $311,000 and $302,000 for the Nine Months Ended 2016 and 2015, respectively.
4.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $4,119,000 and $4,021,000 for the Nine Months Ended 2016 and 2015, respectively.
5.	For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

-22-

Analysis of Net Interest Income Changes

The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

	Third Quarter of 2016 Over
	Third Quarter of 2015
*(In thousands)*	Volume			Rate			Total
Increase (decrease) in interest income:
Loans^{1, 2}:
Taxable	$	189		$	1		$	190
Tax-exempt³		(42	)		22			(20	)
Investment securities:
Taxable		11			10			21
Tax-exempt³		91			(67	)		24
Certificates of deposit		6			4			10
Interest-bearing deposits in other financial institutions		18			64			82
Federal funds sold and other short-term investments		27			71			98
Total interest income		300			105			405
Interest expense on:
Interest-bearing demand deposits		36			(18	)		18
Savings deposits		8			1			9
Time deposits >=$100		(7	)		—			(7	)
Other time deposits		(16	)		3			(13	)
Total interest expense		21			(14	)		7
Net interest income	$	279		$	119		$	398

1.	Average balances include nonaccrual loans.
2.	Interest income includes net loan fees.
3.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

	Nine Months Ended 2016 Over
	Nine Months Ended 2015
*(In thousands)*	Volume			Rate			Total
Increase (decrease) in interest income:
Loans^{1, 2}:
Taxable	$	309		$	(88	)	$	221
Tax-exempt³		(122	)		63			(59	)
Investment securities:
Taxable		19			2			21
Tax-exempt³		757			(416	)		341
Certificates of deposit		12			16			28
Interest-bearing deposits in other financial institutions		(3	)		197			194
Federal funds sold and other short-term investments		40			149			189
Total interest income		1,012			(77	)		935
Interest expense on:
Interest-bearing demand deposits		58			(67	)		(9	)
Savings deposits		13			5			18
Time deposits >=$100		(28	)		(9	)		(37	)
Other time deposits		(51	)		(9	)		(60	)
Total interest expense		(8	)		(80	)		(88	)
Net interest income	$	1,020		$	3		$	1,023

1.	Average balances include nonaccrual loans.
2.	Interest income includes net loan fees.
3.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

Provision and Allowance for Loan Losses (“ALLL”)

A significant determinant of the Company’s operating results can be the provision for loan losses. Provision for loan losses were $0 during the Third Quarter of 2016 and the Third Quarter of 2015. Due to the improved assessment of the overall quality of the Company’s loan portfolio, primarily due to the payoff of a large nonperforming loan, a negative loan loss provision of ($1,000,000) was recorded during the Nine Months Ended 2016. There was no loan loss provision recorded in the Nine Months Ended 2015. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. Net loan recoveries were $1,000 and net loan charge-offs were $20,000 during the Third Quarter of 2016 and the Third Quarter of 2015, respectively. Net loan recoveries were $38,000 in the Nine Months Ended 2016 and net loan charge-offs were $12,000 during the Nine Months Ended 2015.

-23-

The ALLL at September 30, 2016 was $10,673,000 and at December 31, 2015 was $11,635,000. The ratio of ALLL to total loans outstanding at September 30, 2016 was 1.56% compared to 1.77% at December 31, 2015. Nonperforming loans were $1,324,000, or .19%, of total loans at September 30, 2016 compared to $3,135,000, or .48%, of total loans at December 31, 2015. These loans, which are also considered impaired, consisted of one nonaccrual loan and one past due 90 days and accruing at September 30, 2016. Total nonaccrual loans decreased $2,795,000 from December 31, 2015 to September 30, 2016, primarily due to the payoff of two loans.

The ALLL has been established and is maintained to absorb reasonably estimated and probable losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense to cover any deficiency or reduce any excess, as required. The current methodology consists of two components: 1) estimated credit losses on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310 “Allowance for Credit Losses,” and 2) estimated credit losses inherent in the remainder of the loan portfolio in accordance with FASB ASC 450, “Contingencies.” Estimated credit losses is an estimate of the current amount of loans that is probable the Company will be unable to collect according to the original terms.

For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value. For the remainder of the portfolio, the Company groups loans with similar risk characteristics into eight segments and applies historical loss rates to each segment based on a five fiscal-year look-back period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losses in collateral value, trends in credit quality at the Company and in the banking industry and trends in risk-rating agencies are also considered.

The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required levels of regulatory capital. Federal and state agencies review the Company’s methodology for maintaining the ALLL. These agencies may require the Company to adjust the ALLL based on their judgments and interpretations about information available to them at the time of their examinations.

Summary of Asset Quality

The following table presents information on the Company’s provision for loan losses and analysis of the ALLL:

	Third Quarter of						Nine Months Ended
*(In thousands)*	2016			2015			2016			2015
Allowance at beginning of period	$	10,672		$	11,902		$	11,635		$	11,894
Provision charged to expense		—			—			(1,000	)		—
Loans charged off		—			(30	)		—			(30	)
Recoveries on loans previously charged off		1			10			38			18
Net (charge-offs) recoveries		1			(20	)		38			(12	)
Allowance at end of period	$	10,673		$	11,882		$	10,673		$	11,882
Loans outstanding:
Average	$	682,408		$	666,489		$	679,952		$	674,351
September 30		684,874			670,842			684,874			670,842
Ratio of ALLL to loans outstanding:
Average		1.56	%		1.78	%		1.57	%		1.76	%
September 30		1.56	%		1.77			1.56	%		1.77
Impaired loans:
Nonaccrual loans	$	340		$	3,155		$	340		$	3,155
Loans past due 90 days or more		984			—			984			—
Troubled debt restructurings		—			—			—			—
Total impaired loans	$	1,324		$	3,155		$	1,324		$	3,155
Foreclosed assets	$	—			—		$	—			—
Impaired loans as percentage of average loans		.19	%		.47	%		.19	%		.47	%

The Bank had no property carried as other real estate owned as of September 30, 2016 or December 31, 2015.

-24-

Operating Expenses

Total operating expenses for the Third Quarter of 2016 were up 4.1%, or $917,000, compared to the Third Quarter of 2015 and were up $1,944,000 for the Nine Months Ended 2016 compared to the Nine Months Ended 2015.

Personnel expense for the Third Quarter of 2016 increased $558,000 compared to the Third Quarter of 2015 and increased $1,637,000 to $54,267,000 for the Nine Months Ended 2016 compared to the Nine Months Ended 2015 due to strategic investment in staff and technology to win and support new business, annual merit increases, and higher health insurance expense. This was offset by a decrease in retirement plan expense related to the use of new mortality tables and an increase in the discount rate.

Equipment expense for the Third Quarter of 2016 increased $57,000, or 5.3%, compared to the Third Quarter of 2015 and increased $81,000, or 2.5%, for the Nine Months Ended 2016 from the Nine Months Ended 2015.

Other operating expenses for the Third Quarter of 2016 increased $316,000 compared to the Third Quarter of 2015 and increased $232,000 for the Nine Months Ended 2016 from the Nine Months Ended 2015 primarily due to higher outside service and professional service expense.

Income tax expense for the Third Quarter of 2016 decreased $228,000 compared to the Third Quarter of 2015 and decreased $51,000 for the Nine Months Ended 2016 compared to the Nine Months Ended 2015. The effective tax rate was 23.0% and 26.2% for the Third Quarters of 2016 and 2015, respectively, and was 24.8% and 26.0% for the Nine Months Ended 2016 and 2015, respectively. This was the result of credits for the continued strategic investment in technology.

Financial Condition

Total assets at September 30, 2016 were $1,547,653,000, an increase of $92,147,000, or 6.3%, from December 31, 2015. The most significant changes in asset balances during this period were an increase of $49,931,000 in cash and cash equivalents and an increase of $25,819,000 in loans. Changes in cash and cash equivalents reflect the Company’s daily liquidity position and are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.

Total liabilities at September 30, 2016 were $1,335,341,000, an increase of $87,213,000, or 7.0%, from December 31, 2015. Accounts and drafts payable at September 30, 2016 were $682,762,000, an increase of $105,503,000, or 18.3%, from December 31, 2015. Total deposits decreased $22,471,000, or 3.5%, from December 31, 2015. Total shareholders’ equity at September 30, 2016 was $212,312,000, a $4,934,000, or 2.4%, increase from December 31, 2015.

Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when checks clear and higher balances on days when checks are issued. For this reason, average balances are a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).

The increase in total shareholders’ equity of $4,934,000 resulted primarily from net income of $17,924,000 and a decrease of $2,941,000 in accumulated other comprehensive loss. These were offset by an increase in common shares in treasury of $8,252,000 and dividends paid of $7,406,000.

Liquidity and Capital Resources

The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments, was $303,103,000 at September 30, 2016, an increase of $49,931,000, or 19.7%, from December 31, 2015. At September 30, 2016, these assets represented 19.6% of total assets. These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $382,671,000 at September 30, 2016, an increase of $6,975,000 from December 31, 2015. These assets represented 24.7% of total assets at September 30, 2016. Of this total, 96% were state and political subdivision securities. Of the total portfolio, 9.7% mature in one year or less, 15.3% mature in one to five years, and 75.0% mature in five or more years.

-25-

The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $78,000,000 at the following banks: Bank of America, $10,000,000; US Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $5,000,000; and JPM Chase Bank, $6,000,000. The Bank also has secured lines of credit with the Federal Home Loan Bank of $204,136,000 collateralized by commercial mortgage loans. The Company also has secured lines of credit with UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of September 30, 2016 or December 31, 2015.

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 other commercial products of the Bank. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $33,064,000 of CDARS deposits and interest-bearing demand deposits include $76,837,000 of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.

Net cash flows provided by operating activities were $25,615,000 for the Nine Months Ended 2016 compared with $25,805,000 for the Nine Months ended 2015, a decrease of $190,000. 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. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, 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 and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2016, which are estimated to range from $5 million to $7 million.

The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business opportunities available to the Company.

As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non-interest 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 the lower interest rate environment currently faced by the Company, short-term, relatively lower rate liquid investments are reduced in favor of longer-term relatively higher yielding investments and loans.

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. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable.

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.

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.

-26-

The Basel III Capital Rules require FDIC insured depository institutions to meet and maintain several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The FDIC also requires a minimum leverage ratio of 3%, defined as the ratio of Tier 1 capital less purchased mortgage serving rights to total assets, for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly-rated banking organizations.

Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions like Cass, that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The calculation of all types of regulatory capital is subject to deductions and adjustments specified in applicable regulations.

In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:

	September 30, 2016				December 31, 2015
*(Dollars in thousands)*	Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.	$	213,702	22.18	%	$	212,717	23.31	%
Cass Commercial Bank		107,968	16.48	%		99,872	16.90	%
Common Equity Tier I Capital (to risk-weighted assets)
Cass Information Systems, Inc.	$	203,029	21.07	%	$	201,312	22.06	%
Cass Commercial Bank		100,163	15.28	%		92,470	15.65	%
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.	$	203,029	21.07	%	$	201,312	22.06	%
Cass Commercial Bank		100,163	15.28	%		92,470	15.65	%
Tier I capital (to average assets)
Cass Information Systems, Inc.	$	203,029	13.08	%	$	201,312	13.88	%
Cass Commercial Bank		100,163	13.50	%		92,470	13.15	%

Inflation

The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company’s consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.

Impact of New and Not Yet Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 – Revenue from Contracts with Customers. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. Under the ASU, the amendments are effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

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In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC Topic 842). The ASU improves financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Consistent with current generally accepted accounting principles “GAAP”, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

In March 2016, the FASB issued ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU will simplify the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for fiscal periods beginning after December 15, 2016. The impact of the adoption of this ASU is currently being evaluated.

In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets held. Under this standard, a company will be required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. The impact of the adoption of this ASU is currently being evaluated.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15.0% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company’s most recent evaluation, management does not believe the Company’s risk position at September 30, 2016 has changed materially from that at December 31, 2015.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.

There were no changes in the Third Quarter of 2016 in the Company’s internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Management believes the outcome of all such proceedings will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.

ITEM 1A.	RISK FACTORS The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2015, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). There are no material changes to the Risk Factors as disclosed in the Company’s 2015 Annual Report on Form 10-K.

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ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	None.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	None.

ITEM 4.	MINE SAFETY DISCLOSURES
	Not applicable.

ITEM 5.	OTHER INFORMATION
	(a)	None.
	(b)	There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the Third Quarter of 2016.

ITEM 6.	EXHIBITS

	Exhibit 3.1 Second Amended and Restated Bylaws of the Company, as amended effective as of July 18, 2016 (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K filed on July 21, 2016). Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 101.INS XBRL Instance Document. Exhibit 101.SCH XBRL Taxonomy Extension Schema Document. Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document. Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CASS INFORMATION SYSTEMS, INC.

DATE: November 2, 2016	By	/s/ Eric H. Brunngraber
		Eric H. Brunngraber
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)


DATE: November 2, 2016	By	/s/ P. Stephen Appelbaum
		P. Stephen Appelbaum
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Exhibit 31.1

CERTIFICATIONS

I, Eric H. Brunngraber, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Cass Information Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2016

/s/ Eric H. Brunngraber

Eric H. Brunngraber

Chairman, President and Chief

Executive Officer

(Principal Executive Officer)

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Exhibit 31.2

CERTIFICATIONS

I, P. Stephen Appelbaum, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Cass Information Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2016

/s/ P. Stephen Appelbaum

P. Stephen Appelbaum

Executive Vice President and Chief

Financial Officer

(Principal Financial and Accounting Officer)

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cass Information Systems, Inc. (“the Company”) on Form 10-Q for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric H. Brunngraber, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Eric H. Brunngraber

Eric H. Brunngraber

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

November 2, 2016

A signed original of this written statement required by Section 906 has been provided to Cass Information Systems, Inc. and will be retained by Cass Information Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cass Information Systems, Inc. (“the Company”) on Form 10-Q for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, P. Stephen Appelbaum, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ P. Stephen Appelbaum

P. Stephen Appelbaum

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

November 2, 2016

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