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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      June 30, 2017                  

OR

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

     For the transition period from _____________ to _____________

Commission File No. 000-20827
________________
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Missouri         43-1265338
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)  
12444 Powerscourt Drive, Suite 550  
St. Louis, Missouri 63131
(Address of principal executive offices) (Zip Code)

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

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

                    Large Accelerated Filer _____       Accelerated Filer     X        
 
Non-Accelerated Filer _____
(Do not check if a smaller reporting company)		 Smaller Reporting Company _____   Emerging Growth Company _____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____

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

Yes      _____            No           X    

The number of shares outstanding of the registrant's only class of common stock as of July 28, 2017: Common stock, par value $.50 per share –11,203,801 shares outstanding.

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TABLE OF CONTENTS

PART I – Financial Information
 
       Item 1.        FINANCIAL STATEMENTS       
 
Consolidated Balance Sheets
June 30, 2017 (unaudited) and December 31, 2016		 3
 
Consolidated Statements of Income
Three and six months ended June 30, 2017 and 2016 (unaudited)		 4
 
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2017 and 2016 (unaudited)		 5
 
Consolidated Statements of Cash Flows
Six months ended June 30, 2017 and 2016 (unaudited)		 6
 
Notes to Consolidated Financial Statements (unaudited) 7
 
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
 
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
 
Item 4. CONTROLS AND PROCEDURES 29
 
PART II – Other Information – Items 1. – 6. 29
 
SIGNATURES 31

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 2016 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)

June 30,
2017 December 31,
      (Unaudited)       2016
Assets
Cash and due from banks $        14,538 $        11,814
Interest-bearing deposits in other financial institutions 99,984 136,852
Federal funds sold and other short-term investments 186,538 118,077
Cash and cash equivalents 301,060 266,743
Securities available-for-sale, at fair value 431,979 390,552
 
Loans 671,683 664,866
Less: Allowance for loan losses 10,196 10,175
Loans, net 661,487 654,691
Premises and equipment, net 21,259 21,086
Investment in bank-owned life insurance 16,692 16,445
Payments in excess of funding 111,435 105,347
Goodwill 12,569 11,590
Other intangible assets, net 2,217 1,997
Other assets 34,584 36,388
Total assets $ 1,593,282 $ 1,504,839
 
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing $ 201,942 $ 214,656
Interest-bearing 403,097 407,305
Total deposits 605,039 621,961
Accounts and drafts payable 729,403 642,287
Other liabilities 37,482 32,556
Total liabilities 1,371,924 1,296,804
 
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 June 30, 2017 and December 31, 2016 5,966 5,966
Additional paid-in capital 128,478 128,455
Retained earnings 126,032 118,363
Common shares in treasury, at cost (727,346 shares at June 30, 2017 and 742,681 shares at December 31, 2016) (29,922 ) (30,206 )
Accumulated other comprehensive loss (9,196 ) (14,543 )
Total shareholders’ equity 221,358 208,035
Total liabilities and shareholders’ equity $ 1,593,282 $ 1,504,839

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)

Three Months Ended Six Months Ended
June 30, June 30,
      2017       2016       2017       2016
Fee Revenue and Other Income:
Information services payment and processing revenue $      23,282 $      20,880 $      45,571 $      40,425
Bank service fees 389 289 671 647
Gains on sales of securities — 79 — 387
Other 129 209 329 503
Total fee revenue and other income 23,800 21,457 46,571 41,962
 
Interest Income:
Interest and fees on loans 7,104 7,316 14,057 14,447
Interest and dividends on securities:
Taxable 84 21 161 33
Exempt from federal income taxes 2,659 2,437 5,260 4,831
Interest on federal funds sold and other short-term investments 485 236 853 476
Total interest income 10,332 10,010 20,331 19,787
 
Interest Expense:
Interest on deposits 470 504 950 1,017
Net interest income 9,862 9,506 19,381 18,770
Provision for loan losses — — — (1,000 )
Net interest income after provision for loan losses 9,862 9,506 19,381 19,770
Total net revenue 33,662 30,963 65,952 61,732
 
Operating Expense:
Personnel 19,162 18,102 37,961 35,948
Occupancy 889 866 1,731 1,700
Equipment 1,200 1,110 2,504 2,165
Amortization of intangible assets 108 102 207 204
Other operating expense 3,542 2,879 6,816 5,958
Total operating expense 24,901 23,059 49,219 45,975
Income before income tax expense 8,761 7,904 16,733 15,757
Income tax expense 2,248 2,035 3,913 4,055
Net income $ 6,513 $ 5,869 $ 12,820 $ 11,702
 
Basic earnings per share $ .58 $ .53 $ 1.15 $ 1.05
Diluted earnings per share .58 .52 1.13 1.03

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)

Three Months Ended Six Months Ended
June 30, June 30,
      2017       2016       2017       2016
Comprehensive Income:
Net income $      6,513 $      5,869 $      12,820 $      11,702
Other comprehensive income:
Net unrealized gain on securities available-for-sale 5,832 4,538 8,345 8,212
Tax effect (2,167 ) (1,686 ) (3,100 ) (3,051 )
 
Reclassification adjustments for gains included in net income — (79 ) — (387 )
Tax effect — 29 — 143
 
Foreign currency translation adjustments 94 (35 ) 102 11
Total comprehensive income $ 10,272 $ 8,636 $ 18,167 $ 16,630

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)

Six Months Ended
June 30,
      2017       2016
Cash Flows From Operating Activities:
Net income $      12,820 $      11,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,471 4,613
Net gains on sales of securities — (387 )
Stock-based compensation expense 1,097 985
Provision for loan losses — (1,000 )
Decrease in income tax benefit — 16
Increase in income tax liability 748 1,325
Increase in pension liability 2,310 2,010
Other operating activities, net (978 ) (1,512 )
Net cash provided by operating activities 21,468 17,752
 
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale — 21,491
Proceeds from maturities of securities available-for-sale 25,694 19,609
Purchase of securities available-for-sale (62,279 ) (28,053 )
Net increase in loans (6,796 ) (39,042 )
Increase in payments in excess of funding (6,088 ) (11,674 )
Purchases of premises and equipment, net (1,935 ) (2,631 )
Net cash used in investing activities (51,404 ) (40,300 )
 
Cash Flows From Financing Activities:
Net (decrease) increase in noninterest-bearing demand deposits (12,714 ) 13,813
Net decrease in interest-bearing demand and savings deposits (1,077 ) (27,575 )
Net decrease in time deposits (3,131 ) (1,728 )
Net increase in accounts and drafts payable 87,116 73,729
Cash dividends paid (5,151 ) (4,947 )
Purchase of common shares for treasury — (9,217 )
Other financing activities, net (790 ) (566 )
Net cash provided by financing activities 64,253 43,509
Net increase in cash and cash equivalents 34,317 20,961
Cash and cash equivalents at beginning of period 266,743 253,172
Cash and cash equivalents at end of period $ 301,060 $ 274,133
 
Supplemental information:
Cash paid for interest $ 956 $ 1,009
Cash paid for income taxes 3,152 2,787

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, 2016.

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.

In March 2017, the Company completed an acquisition and recorded intangible assets of $1,406,000. Those intangible assets were valued as $980,000 for goodwill, $355,000 for the customer list and $71,000 for non-compete agreements.

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

June 30, 2017 December 31, 2016
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands)       Amount       Amortization       Amount       Amortization
Assets eligible for amortization:
Customer lists $      4,288 $      (2,517) $      3,933 $      (2,342)
Patents 72 (10) 72 (8)
Non-compete agreements 332 (273) 261 (261)
Software 234 (234) 234 (234)
Other 500 (175) 500 (158)
Unamortized intangible assets:
Goodwill1 12,796 (227) 11,817 (227)
Total intangible assets $ 18,222 $ (3,436) $ 16,817 $ (3,230)
1 Amortization 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 two and five years; software over three years; and other intangible assets over fifteen years. Amortization of intangible assets amounted to $207,000 and $204,000 for the six-month periods ended June 30, 2017 and 2016, respectively. Estimated annual amortization of intangibles is as follows: $427,000 in 2017, $442,000 in 2018, $412,000 in 2019, and $406,000 in each of 2020 and 2021.

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 three and six months ended June 30, 2017 and 2016. The calculations of basic and diluted earnings per share are as follows:

-7-

Three Months Ended Six Months Ended
June 30, June 30,
(In thousands except share and per share data)       2017       2016       2017       2016
Basic
Net income $       6,513 $       5,869 $       12,820 $       11,702
Weighted-average common shares outstanding 11,153,260 11,134,559 11,145,996 11,184,058
Basic earnings per share $ .58 $ .53 $ 1.15 $ 1.05
 
Diluted
Net income $ 6,513 $ 5,869 $ 12,820 $ 11,702
Weighted-average common shares outstanding 11,153,260 11,134,559 11,145,996 11,184,058
Effect of dilutive restricted stock and stock appreciation rights 168,241 153,459 167,460 153,379
Weighted-average common shares outstanding assuming dilution 11,321,501 11,288,018 11,313,456 11,337,437
Diluted earnings per share $ .58 $ .52 $ 1.13 $ 1.03

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 17, 2016, 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 111,241 shares during the three-month periods and 0 and 187,123 shares for the six-month periods ended June 30, 2017 and 2016, respectively. As of June 30, 2017, 500,000 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.

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, 2016. 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.

-8-

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 June 30, 2017
Fee revenue and other income:
Income from customers $      26,749 $      6,913 $      — $      33,662
Intersegment income (expense) 3,049 383 (3,432 ) —
Net income 3,932 2,581 — 6,513
Goodwill 12,433 136 — 12,569
Other intangible assets, net 2,217 — — 2,217
Total assets 863,562 742,659 (12,939 ) 1,593,282
Three Months Ended June 30, 2016
Fee revenue and other income
Income from customers $ 24,436 $ 6,527 $ — $ 30,963
Intersegment income (expense) 2,815 403 (3,218 ) —
Net income 3,478 2,391 — 5,869
Goodwill 11,454 136 — 11,590
Other intangible assets, net 2,201 — — 2,201
Total assets 777,312 753,333 (9,461 ) 1,521,184
Six Months Ended June 30, 2017
Fee revenue and other income:
Income from customers $ 52,395 $ 13,557 $ — $ 65,952
Intersegment income (expense) 6,013 744 (6,757 ) —
Net income 7,755 5,065 — 12,820
Goodwill 12,433 136 — 12,569
Other intangible assets, net 2,217 — — 2,217
Total assets 863,562 742,659 (12,939 ) 1,593,282
Six Months Ended June 30, 2016
Fee revenue and other income:
Income from customers $ 47,994 $ 13,738 $ — $ 61,732
Intersegment income (expense) 6,073 779 (6,852 ) —
Net income 6,425 5,277 — 11,702
Goodwill 11,454 136 — 11,590
Other intangible assets, net 2,201 — — 2,201
Total assets 777,312 753,333 (9,461 ) 1,521,184

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Note 6 – Loans by Type

A summary of loan categories is as follows:

June 30, December 31,
(In thousands)       2017       2016
Commercial and industrial $      225,627 $      214,767
Real estate
Commercial:
Mortgage 94,367 104,779
Construction 8,482 6,325
Church, church-related:
Mortgage 325,906 321,168
Construction 12,214 11,152
Industrial revenue bonds 5,007 6,639
Other 80 36
Total loans $ 671,683 $ 664,866

The following table presents the aging of loans by loan categories at June 30, 2017 and December 31, 2016:

Performing Nonperforming
90 Days
30-59 60-89 and Non- Total
(In thousands)       Current       Days       Days       Over       accrual       Loans
June 30, 2017
Commercial and industrial $      225,627 $      — $      — $      — $      — $      225,627
Real estate
Commercial:
Mortgage 94,148 — — — 219 94,367
Construction 8,482 — — — — 8,482
Church, church-related:
Mortgage 325,906 — — — — 325,906
Construction 12,214 — — — — 12,214
Industrial revenue bonds 5,007 — — — — 5,007
Other 80 — — — — 80
Total $ 671,464 $ — $ — $ — $ 219 $ 671,683
December 31, 2016
Commercial and industrial $ 214,767 $ — $ — $ — $ — $ 214,767
Real estate
Commercial:
Mortgage 104,534 — — — 245 104,779
Construction 6,325 — — — — 6,325
Church, church-related:
Mortgage 321,168 — — — — 321,168
Construction 11,152 — — — — 11,152
Industrial revenue bonds 6,639 — — — — 6,639
Other 24 12 — — — 36
Total $ 664,609 $ 12 $ — $ — $ 245 $ 664,866

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The following table presents the credit exposure of the loan portfolio by internally credit grade as of June 30, 2017 and December 31, 2016:

Loans Performing Nonperforming
Subject to Loans Subject to Loans Subject
Normal Special to Special
(In thousands)       Monitoring1       Monitoring2       Monitoring2       Total Loans
June 30, 2017
Commercial and industrial $      223,968 $      1,659 $      — $      225,627
Real estate
Commercial:
Mortgage 93,422 726 219 94,367
Construction 8,482 — — 8,482
Church, church-related:
Mortgage 325,822 84 — 325,906
Construction 12,214 — — 12,214
Industrial Revenue Bonds 5,007 — — 5,007
Other 80 — — 80
Total $ 668,995 $ 2,469 $ 219 $ 671,683
December 31, 2016
Commercial and industrial $ 213,024 $ 1,743 $ — $ 214,767
Real estate
Commercial:
Mortgage 103,778 756 245 104,779
Construction 6,325 — — 6,325
Church, church-related:
Mortgage 318,030 3,138 — 321,168
Construction 11,152 — — 11,152
Industrial revenue bonds 6,639 — — 6,639
Other 36 — — 36
Total $ 658,984 $ 5,637 $ 245 $ 664,866
1 Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligations.
2 Loans 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 June 30, 2017 and December 31, 2016, impaired loans were evaluated using the expected cash flow method. There were no loans delinquent 90 days or more and still accruing interest at June 30, 2017 and December 31, 2016. There were no loans classified as troubled debt restructuring at June 30, 2017 and December 31, 2016.

There were no foreclosed loans recorded as other real estate owned as of June 30, 2017, and December 31, 2016.

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The following table presents the recorded investment and unpaid principal balance for impaired loans at June 30, 2017 and December 31, 2016:

Unpaid Related
Recorded Principal Allowance for
(In thousands)       Investment       Balance       Loan Losses
June 30, 2017
Commercial and industrial:
Nonaccrual $      — $      — $      —
Real estate
Commercial – Mortgage:
Nonaccrual 219 219 —
Church – Mortgage:
Nonaccrual — — —
Total impaired loans $ 219 $ 219 $ —
December 31, 2016
Commercial and industrial:
Nonaccrual $ — $ — $ —
Real estate
Commercial – Mortgage:
Nonaccrual 245 245 —
Church – Mortgage:
Nonaccrual — — —
Total impaired loans $ 245 $ 245 $ —

A summary of the activity in the allowance for loan losses from December 31, 2016 to June 30, 2017 is as follows:

December 31, Charge- June 30,
(In thousands)       2016       Offs       Recoveries       Provision       2017
Commercial and industrial $      3,261 $      — $      21 $          144 $      3,426
Real estate
Commercial:
Mortgage 1,662 — — (164 ) 1,498
Construction 47 — — 16 63
Church, church-related:
Mortgage 4,027 — — 61 4,088
Construction 85 — — 8 93
Industrial Revenue Bonds 101 — — (25 ) 76
Other 992 — — (40 ) 952
Total $ 10,175 $ — $ 21 $ — $ 10,196

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

December 31, Charge- June 30,
(In thousands)       2015       Offs       Recoveries       Provision       2016
Commercial and industrial $      3,083 $      — $      37 $       497 $      3,617
Real estate
Commercial:
Mortgage 2,803 — — (1,113 ) 1,690
Construction 9 — — 96 105
Church, church-related:
Mortgage 4,082 — — 34 4,116
Construction 217 — — (30 ) 187
Industrial Revenue Bonds 320 — — (34 ) 286
Other 1,121 — — (450 ) 671
Total $ 11,635 $ — $ 37 $ (1,000 ) $ 10,672

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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 June 30, 2017 and December 31, 2016, no amounts have been accrued for any estimated losses for these instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At June 30, 2017, the balance of unused loan commitments, standby and commercial letters of credit were $65,583,000, $13,977,000, and $2,759,000, respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under guarantees on these financial instruments.

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at June 30, 2017:

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 $      5,589 $      1,448 $      2,036 $      1,656 $      449
Time deposits 52,653 47,759 2,319 2,575 —
Total $ 58,242 $ 49,207 $ 4,355 $ 4,231 $ 449

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 may issue shares out of treasury stock for these awards. During the six months ended June 30, 2017, 22,545 restricted shares, 23,038 performance-based restricted shares, and 0 SARs were granted under the Omnibus Plan.

Restricted Stock

Restricted shares granted prior to April 16, 2013 were 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 June 30, 2017, the total unrecognized compensation expense related to non-vested restricted shares was $2,217,000, and the related weighted-average period over which it is expected to be recognized is approximately 1.0 year.

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

Six Months Ended
June 30, 2017
      Shares       Fair Value
Balance at December 31, 2016 73,840 $      51.03
Granted 22,545 $ 65.42
Vested (26,545 ) $ 52.34
Balance at June 30, 2017 69,840 $ 55.18

Performance-Based Restricted Stock

On February 2, 2017, the Company granted three-year performance based restricted stock (“PBRS”) awards which are contingent upon the achievement of pre-established financial goals over the period from January 1, 2017 through December 31, 2019. The PBRS awards cliff vest on the three-year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the three-year performance period. The target number of PBRS shares granted was 23,038 with a grant date fair value of $65.12 per share. The 2017 expense related to this grant is currently estimated to be $458,000 and is based on the grant date fair value and the achievement of 100% of the target financial goals. The estimated expense for 2017 and each future period through the vesting date is subject to prospective adjustment based upon changes in the expected achievement of the financial goals.

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 June 30, 2017, all compensation expense has been recognized and all granted SARs are vested. Following is a summary of the activity of the Company’s SARs program for the six-month period ended June 30, 2017:

Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
      Shares       Price       Term Years       (In thousands)
Outstanding at December 31, 2016 237,468 $      38.22 5.73 $      3,201
Exercised (15,547 ) 40.60
Outstanding at June 30, 2017 221,921 38.05 4.71 6,122
Exercisable at June 30, 2017 221,921 $ 38.05 4.71 $ 6,122

Note 9 – Defined Pension Plans

The Company has a noncontributory defined-benefit pension plan, which covers most of its employees. Effective December 31, 2016, the Plan was closed to all new participants. 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:

Estimated Actual
(In thousands)       2017       2016
Service cost – benefits earned during the year $       3,805 $      3,559
Interest cost on projected benefit obligations 3,587 3,505
Expected return on plan assets (4,680 ) (4,734 )
Net amortization and deferral 1,328 1,259
Net periodic pension cost $ 4,040 $ 3,589

Pension costs recorded to expense were $1,017,000 and $882,000 for the three-month periods ended June 30, 2017 and 2016, respectively and $2,037,000 and $1,759,000 for the six-month periods ended June 30, 2017 and 2016, respectively. Pension costs increased in 2017 due to a decrease in the discount rate and expected return on plan assets assumptions and the use of the updated mortality tables. The Company made no contribution to the plan during the six-month period ended June 30, 2017 and is evaluating the amount of additional contributions, if any, in the remainder of 2017.

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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 2016 and an estimate for 2017:

      Estimated       Actual
(In thousands) 2017 2016
Service cost – benefits earned during the year $       143 $       133
Interest cost on projected benefit obligation 361 367
Net amortization 323 295
Net periodic pension cost $ 827 $ 795

Pension costs recorded to expense were $209,000 and $202,000 for the three-month periods ended June 30, 2017 and 2016, respectively, and were $418,000 and $403,000 for the six-month periods ended June 30, 2017 and 2016, respectively.

Note 10 – Income Taxes

As of June 30, 2017, the Company’s unrecognized tax benefits were approximately $1,835,000, of which $1,416,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2016, the Company’s unrecognized tax benefits were approximately $1,623,000, of which $1,225,000 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 $253,000 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 $142,000 and $108,000 of gross interest accrued as of June 30, 2017 and December 31, 2016, respectively. There were no penalties for unrecognized tax benefits accrued at June 30, 2017 and December 31, 2016.

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 2013 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.

On January 1, 2017, the Company adopted ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The adoption of this new accounting pronouncement resulted in a $35,000 and $278,000 reduction in income tax expense for the three-month and six-month periods ending June 30, 2017, respectively.

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:

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      June 30, 2017
Gross Gross
Amortized       Unrealized       Unrealized      
(In thousands) Cost Gains Losses Fair Value
State and political subdivisions $ 403,935 $ 11,256 $ 1,076 $ 414,115
U.S. government agencies 12,446 — 328 12,118
Certificates of deposit 5,746 — — 5,746
Total $ 422,127 $ 11,256 $ 1,404 $ 431,979
 
December 31, 2016
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
State and political subdivisions $ 368,223 $ 5,239 $ 3,328 $ 370,134
U.S. government agencies 13,075 — 403 12,672
Certificates of deposit 7,746 — — 7,746
Total $ 389,044 $ 5,239 $ 3,731 $ 390,552

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

      June 30, 2017      
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 subdivisions $ 45,082 $ 1,076 $ — $ — $ 45,082 $ 1,076
U.S. government agencies 12,118 328 — — 12,118 328
Certificates of deposit — — — — — —
Total $ 57,200 $ 1,404 $ — $ — $ 57,200 $ 1,404
 
December 31, 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 subdivisions $      140,384 $      3,328 $      — $      — $      140,384 $      3,328
U.S. government agencies 12,672 403 — — 12,672 403
Certificates of deposit — — — — — —
Total $ 153,056 $ 3,731 $ — $ — $ 153,056 $ 3,731

There were 35 securities, or 11% of the total (none greater than 12 months) in an unrealized loss position as of June 30, 2017. There were 108 securities, 31% of the total (none greater than 12 months), in an unrealized loss position as of December 31, 2016. 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.

      June 30, 2017
(In thousands) Amortized Cost       Fair Value
Due in 1 year or less $ 21,393 $ 21,574
Due after 1 year through 5 years 58,167 59,364
Due after 5 years through 10 years 207,799 215,950
Due after 10 years 134,768 135,091
Total $ 422,127 $ 431,979

Proceeds from sales of investment securities classified as available-for-sale were $0 and $2,452,000 for the three months ended June 30, 2017 and 2016, respectively, and were $0 and $21,491,000 for the six months ended June 30, 2017 and 2016, respectively. Gross realized gains were $0 and $79,000 for the three months ended June 30, 2017 and 2016, respectively, and were $0 and $387,000 for the six months ended June 30, 2017 and 2016, respectively. There was one security totaling $3,750,000 pledged to secure public deposits and for other purposes at June 30, 2017.

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Note 12 – Fair Value of Financial Instruments

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

      June 30, 2017 December 31, 2016
Carrying             Carrying      
(In thousands) Amount Fair Value Amount Fair Value
Balance sheet assets:
Cash and cash equivalents $ 301,060 $ 301,060 $ 266,743 $ 266,743
Investment securities 431,979 431,979 390,552 390,552
Loans, net 661,487 658,280 654,691 652,028
Accrued interest receivable 7,037 7,037 6,543 6,543
Total $       1,401,563 $       1,398,356 $       1,318,529 $       1,315,866
Balance sheet liabilities:
Deposits $ 605,039 $ 605,382 $ 621,961 $ 622,173
Accounts and drafts payable 729,403 729,403 642,287 642,287
Accrued interest payable 41 41 46 46
Total $ 1,334,483 $ 1,334,826 $ 1,264,294 $ 1,264,506

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.

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 expected cash flow method or 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 six months ended June 30, 2017 and 2016. No financial instruments are measured using Level 3 inputs for the six months ended June 30, 2017 and 2016.

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 June 30, 2017, and there were no events identified that would require additional disclosures to prevent the Company’s unaudited consolidated financial statements from being misleading.

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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.

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 2016 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.

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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.

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, 2016, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Item 8, Note 10 to the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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 June 30, 2017 (“Second Quarter of 2017”) compared to the three-month period ended June 30, 2016 (“Second Quarter of 2016”) and the six-month period ended June 30, 2017 (“First Half of 2017”) compared to the six-month period ended June 30, 2016 (“First Half of 2016”). 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 2016 Annual Report on Form 10-K. Results of operations for the Second Quarter and First Half of 2017 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:

      Second Quarter of       First Half of
            %             %
(In thousands except per share data) 2017 2016 Change 2017 2016   Change
Net income $       6,513 $       5,869 11.0 $       12,820 $       11,702 9.6
Diluted earnings per share $ .58 $ .52 11.5 $ 1.13 $ 1.03 9.7
Return on average assets 1.70 % 1.59 % — 1.70 % 1.60 % —
Return on average equity 12.13 % 11.44 % — 12.24 % 11.41 % —

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Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and facility payment and processing fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis 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:

    Second Quarter of     First Half of
        %         %
(In thousands) 2017 2016 Change 2017 2016 Change
Transportation invoice volume 9,248 8,776 5.4 % 17,623 16,888 4.4 %
Transportation invoice dollar
volume $       6,231,378 $       5,800,675 7.4 % $       12,108,221 $       11,243,007 7.7 %
Expense management  
transaction volume* 6,729 5,667 18.7 % 13,542 10,955       23.6 %
Expense management dollar  
volume* $ 3,079,988 $ 2,775,639 11.0 % $ 6,255,901 $ 5,581,132 12.1 %
Payment and processing revenue $ 23,282 $ 20,880 11.5 % $ 45,571 $ 40,425 12.7 %
*Includes energy, telecom and waste

Second Quarter of 2017 compared to Second Quarter of 2016:

In the transportation sector, a growing roster of clients and an increase in base activity boosted invoice volume by 5.4% and dollar volume by 7.4%. The expense management group had growth of 18.7% in transaction volume. New customer wins, combined with increased volume from current accounts, fueled the increase. Expense management dollar volume was also up 11.0% for the period.

There were no gains on sales of securities in the Second Quarter of 2017, compared to $79,000 in the Second Quarter of 2016.

First Half of 2017 compared to First Half of 2016:

Transportation invoice and dollar volumes, as well as expense management transaction and dollar volumes, increased for the same reasons as the Second Quarter.

There were no gains on sales of securities in the First Half of 2017, compared to $387,000 in the First Half of 2016.

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:

    Second Quarter of     First Half of
        %         %
(In thousands) 2017 2016 Change 2017 2016 Change
Average earnings assets $      1,332,829 $      1,289,339 3.4 % $      1,324,478 $      1,275,824 3.8 %
Average interest-bearing
liabilities 380,197 426,287 (10.8 )% 386,372 425,834 (9.3 )%
Net interest income* 11,312 10,896 3.8 % 22,252 21,528 3.4 %
Net interest margin* 3.40 % 3.40 % 3.39 % 3.39 %
Yield on earning assets* 3.55 % 3.56 %   3.53 % 3.55 %
Rate on interest-bearing
liabilities .50 % .48 % .50 % .48 %
*Presented on a tax-equivalent basis assuming a tax rate of 35%.

Second Quarter of 2017 compared to Second Quarter of 2016:

Second Quarter of 2017 average earning assets increased $43,490,000, or 3.4%, compared to the same period in the prior year. 

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Average investment securities increased $73,864,000, or 21.4% and average federal funds sold and other short-term investments increased $32,348,000, or 27.1% for the Second Quarter of 2017 as compared to the Second Quarter of 2016. These increases were partially offset by interest-bearing cash deposits decreasing $36,535,000, or 29.5% and loans decreasing $24,708,000, or 3.6%. This net increase was the result of additional balances from funding sources.

Average accounts and drafts payable balances for the Second Quarter of 2017 increased $62,075,000, or 9.7%, as compared to the Second Quarter of 2016. This was partially offset by a decrease in total average interest-bearing deposits for the Second Quarter of 2017 of $46,090,000, or 10.8%, compared to the Second Quarter of 2016. Average interest-bearing demand deposits decreased $35,816,000, or 10.3% and time deposits decreased $5,911,000, or 9.7% for the Second Quarter of 2017.

Net interest margin and yield on earning assets remained stable in the Second Quarter of 2017 compared to the Second Quarter of 2016.

First Half of 2017 compared to First Half of 2016:

First Half of 2017 average earning assets increased $48,654,000, or 3.8%, compared to the same period in the prior year.

Average investment securities increased $69,107,000, or 20.1% and average federal funds sold and other short-term investments increased $29,578,000, or 25.8% for the First Half of 2017 as compared to the First Half of 2016. These increases were partially offset by interest-bearing cash deposits decreasing $32,858,000, or 25.2% and loans decreasing $16,412,000, or 2.4%. This net increase was the result of additional balances from funding sources.

Average accounts and drafts payable balances for the First Half of 2017 increased $59,421,000, or 9.5% as compared to the First Half of 2016. This was partially offset by a decrease in total average interest-bearing deposits for the First Half of 2017 of $39,462,000, or 9.3% compared to the First Half of 2016. For the First Half of 2017, average interest-bearing demand deposits decreased $34,846,000, or 10.1% and time deposits decreased $5,628,000, or 9.2%.

Net interest margin and yield on earning assets remained relatively stable in the First Half of 2017 compared to the First Half of 2016.

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.

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Second Quarter of 2017 Second Quarter of 2016
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(In thousands)       Balance       Expense       Rate       Balance       Expense       Rate
Assets1
Earning assets
Loans2, 3:
Taxable $      662,763 $        7,071     4.28 % $      674,227 $      7,173     4.28 %
Tax-exempt4 5,277 53 4.03 18,521 221 4.80
Investment securities5:
Taxable 13,819 72 2.09 1,196 10 3.36
Tax-exempt4 405,489 4,090 4.05 344,248 3,748 4.38
Certificates of deposit 6,139 12 .78 7,618 12 .63
Interest-bearing deposits in other financial institutions 87,510 205 .94 124,045 154 .50
Federal funds sold and other short-term investments 151,832 279 .74 119,484 82 .28
Total earning assets 1,332,829 11,782 3.55 1,289,339 11,400 3.56
Non-earning assets
Cash and due from banks 12,443 11,481
Premises and equipment, net 21,257 20,496
Bank-owned life insurance 16,615 16,110
Goodwill and other intangibles 14,518 13,851
Other assets 145,173 147,701
Allowance for loan losses (10,193 ) (10,649 )
Total assets $ 1,532,642 $ 1,488,329
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
Interest-bearing demand deposits $ 311,782 $ 331 .43 % $ 347,598 $ 345 .40 %
Savings deposits 13,271 15 .45 17,634 21 .48
Time deposits >= $100 23,508 66 1.13 21,676 66 1.22
Other time deposits 31,636 58 .74 39,379 72 .74
Total interest-bearing deposits 380,197 470 .50 426,287 504 .48
Non-interest bearing liabilities
Demand deposits 199,508 187,668
Accounts and drafts payable 703,088 641,013
Other liabilities 34,466 27,069
Total liabilities 1,317,259 1,282,037
Shareholders’ equity 215,383 206,292
Total liabilities and shareholders’ equity $ 1,532,642 $ 1,488,329
Net interest income $ 11,312 $ 10,896
Net interest margin 3.40 % 3.40 %
Interest spread 3.05 3.08
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 2016 consolidated financial statements, filed with the Company’s 2016 Annual Report on Form 10-K.
3. Interest income on loans includes net loan fees of $91,000 and $93,000 for the Second Quarter of 2017 and 2016, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $1,450,000 and $1,390,000 for the Second Quarter of 2017 and 2016, 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.

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First Half of 2017 First Half of 2016
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(In thousands)       Balance       Expense       Rate       Balance       Expense       Rate
Assets1
Earning assets
Loans2, 3:
Taxable $      656,615 $      13,986       4.30 % $      659,782 $      14,157       4.31 %
Tax-exempt4 5,684 111 3.94 18,929 447 4.75
Investment securities5:
Taxable 13,975 138 1.99 1,193 10 1.69
Tax-exempt4 399,755 8,092 4.08 343,430 7,432 4.35
Certificates of deposit 6,504 23 .71 7,265 23 .64
Interest-bearing deposits in other financial institutions 97,682 403 .83 130,540 323 .50
Federal funds sold and other short-term investments 144,263 449 .63 114,685 153 .27
Total earning assets 1,324,478 23,202 3.53 1,275,824 22,545 3.55
Non-earning assets
Cash and due from banks 12,741 11,523
Premises and equipment, net 21,210 20,167
Bank-owned life insurance 16,553 16,045
Goodwill and other intangibles 14,239 13,902
Other assets 141,453 141,804
Allowance for loan losses (10,186 ) (11,137 )
Total assets $ 1,520,488 $ 1,468,128
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
Interest-bearing demand deposits $ 311,480 $ 657 .43 % $ 346,326 $ 695 .40 %
Savings deposits 19,302 45 .47 18,290 44 .48
Time deposits >= $100 23,112 127 1.11 22,520 133 1.19
Other time deposits 32,478 121 .75 38,698 145 .75
Total interest-bearing deposits 386,372 950 .50 425,834 1,017 .48
Non-interest bearing liabilities
Demand deposits 203,451 184,129
Accounts and drafts payable 685,929 626,508
Other liabilities 33,550 25,468
Total liabilities 1,309,302 1,261,939
Shareholders’ equity 211,186 206,189
Total liabilities and shareholders’ equity $ 1,520,488 $ 1,468,128
Net interest income $ 22,252 $ 21,528
Net interest margin 3.39 % 3.39 %
Interest spread 3.03 3.07
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 2016 consolidated financial statements, filed with the Company’s 2016 Annual Report on Form 10-K.
3. Interest income on loans includes net loan fees of $243,000 and $235,000 for the First Half of 2017 and 2016, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $2,871,000 and $2,758,000 for the First Half of 2017 and 2016, 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.

-23-

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.

Second Quarter of 2017 Over
Second Quarter of 2016
(In thousands)       Volume       Rate       Total
Increase (decrease) in interest income:
Loans1, 2:
Taxable $      (103 ) $      1 $      (102 )
Tax-exempt3 (137 ) (31 ) (168 )
Investment securities:
Taxable 67 (5 ) 62
Tax-exempt3 640 (298 ) 342
Certificates of deposit (3 ) 3 —
Interest-bearing deposits in other financial institutions (55 ) 106 51
Federal funds sold and other short-term investments 27 170 197
Total interest income 436 (54 ) 382
Interest expense on:
Interest-bearing demand deposits (37 ) 23 (14 )
Savings deposits (5 ) (1 ) (6 )
Time deposits >=$100 5 (5 ) —
Other time deposits (14 ) — (14 )
Total interest expense (51 ) 17 (34 )
Net interest income $ 487 $ (71 ) $ 416
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%.

First Half of 2017 Over
First Half of 2016
(In thousands)       Volume       Rate       Total
Increase (decrease) in interest income:
Loans1, 2:
Taxable $      (88 ) $      (83 ) $      (171 )
Tax-exempt3 (270 ) (66 ) (336 )
Investment securities:
Taxable 126 2 128
Tax-exempt3 1,146 (486 ) 660
Certificates of deposit (3 ) 3 —
Interest-bearing deposits in other financial institutions (96 ) 176 80
Federal funds sold and other short-term investments 48 248 296
Total interest income 863 (206 ) 657
Interest expense on:
Interest-bearing demand deposits (73 ) 35 (38 )
Savings deposits 2 (1 ) 1
Time deposits >=$100 3 (9 ) (6 )
Other time deposits (24 ) — (24 )
Total interest expense (92 ) 25 (67 )
Net interest income $ 955 $ (231 ) $ 724
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. There was no provision for loan losses during the Second Quarter of 2017 or the Second Quarter of 2016. There was no loan loss provision recorded in the First Half of 2017 and a negative loan loss provision of $1,000,000 was recorded during the First Half of 2016. 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 $5,000 and  $35,000 during the Second Quarter of 2017 and the Second Quarter of 2016, respectively. Net loan recoveries were $21,000 in the First Half of 2017 and $37,000 during the First Half of 2016.

-24-

The ALLL at June 30, 2017 was $10,196,000 and at December 31, 2016 was $10,175,000. The ratio of ALLL to total loans outstanding was 1.52% and 1.53% at June 30, 2017 and December 31, 2016, respectively. Nonperforming loans were $219,000, or .03%, of total loans at June 30, 2017 compared to $245,000, or .04%, of total loans at December 31, 2016. This consists of one nonaccrual loan, which is also considered impaired, at June 30, 2017. Total nonaccrual loans decreased $26,000 from December 31, 2016 to June 30, 2017.

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:

Second Quarter of First Half of
(In thousands)       2017       2016       2017       2016
Allowance at beginning of period $      10,191 $      10,637 $      10,175 $      11,635
Provision charged to expense — — — (1,000 )
Loans charged off — — — —
Recoveries on loans previously charged off 5 35 21 37
Net recoveries 5 35 21 37
Allowance at end of period $ 10,196 $ 10,672 $ 10,196 $ 10,672
Loans outstanding:
Average $ 668,040 $ 692,748 $ 662,299 $ 678,711
June 30 671,683 698,134 671,683 698,134
Ratio of ALLL to loans outstanding:
Average 1.53 % 1.54 % 1.54 % 1.57 %
June 30 1.52 % 1.53 % 1.52 % 1.53 %
Impaired loans:
Nonaccrual loans $ 219 $ 362 $ 219 $ 362
Loans past due 90 days or more — — — —
Troubled debt restructurings — — — —
Total impaired loans $ 219 $ 362 $ 219 $ 362
Foreclosed assets $ — $ — $ — $ —
Impaired loans as percentage of average loans .03 % .05 % .03 % .05 %

The Bank had no property carried as other real estate owned as of June 30, 2017 or December 31, 2016.

-25-

Operating Expenses

Total operating expenses for the Second Quarter of 2017 were up 8.0%, or $1,842,000, compared to the Second Quarter of 2016 and were up $3,244,000 for the First Half of 2017 compared to the First Half of 2016.

Personnel expense for the Second Quarter of 2017 increased $1,060,000 compared to the Second Quarter of 2016 and increased $2,013,000 to $37,961,000 for the First Half of 2017 compared to the First Half of 2016 due to strategic investment in staff and technology to win and support new business, annual salary merit increases, and increased retirement plan costs.

Outside service expense for the Second Quarter of 2017 increased $492,000, or 35.6%, compared to the Second Quarter of 2016 and $1,047,000, or 42.4%, for the First Half of 2017 compared to the First Half of 2016. This increase was due to new strategic partnerships and professional costs associated with an acquisition.

Equipment expense for the Second Quarter of 2017 increased $90,000, or 8.1%, compared to the Second Quarter of 2016 and $339,000, or 15.7%, for the First Half of 2017 from the First Half of 2016. This increase was the result of the continued strategic investment in technology.

Income tax expense for the Second Quarter of 2017 increased $213,000 compared to the Second Quarter of 2016 and decreased $142,000 for the First Half of 2017 compared to the First Half of 2016. The effective tax rate was 25.7% for both the Second Quarters of 2017 and 2016 and was 23.4% and 25.7% for the First Halves of 2017 and 2016, respectively. The decrease in the First Half 2017 tax was the result of the adoption of ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting along with credits for the continued strategic investment in technology.

Financial Condition

Total assets at June 30, 2017 were $1,593,282,000, an increase of $88,443,000, or 5.9%, from December 31, 2016. The most significant changes in asset balances during this period were an increase of $41,427,000 in investment securities and an increase of $34,317,000 in cash and cash equivalents. 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 June 30, 2017 were $1,371,924,000, an increase of $75,120,000, or 5.8%, from December 31, 2016. Accounts and drafts payable at June 30, 2017 were $729,403,000, an increase of $87,116,000, or 13.6%. Total deposits decreased $16,922,000, or 2.7%, from December 31, 2016. Total shareholders’ equity at June 30, 2017 was $221,358,000, a $13,323,000, or 6.4%, increase from December 31, 2016.

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 payments clear and higher balances on days when payments 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 $13,323,000 resulted primarily from net income of $12,820,000 and a decrease of $5,347,000 in accumulated other comprehensive loss. These were offset by dividends paid of $5,151,000.

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 $301,060,000 at June 30, 2017, an increase of $34,317,000, or 12.9%, from December 31, 2016. At June 30, 2017, these assets represented 18.9% 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 $431,979,000 at June 30, 2017, an increase of $41,427,000 from December 31, 2016. These assets represented 27.1% of total assets at June 30, 2017. Of this total, 96% were state and political subdivision securities. Of the total portfolio, 4.0% mature in one year or less, 14.2% mature in one to five years, and 81.8% mature in five or more years. 

-26-

The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $68,000,000 at the following banks: 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 $215,010,000 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 June 30, 2017 or December 31, 2016.

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 $29,346,000 of CDARS deposits and interest-bearing demand deposits include $74,498,000 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 $21,468,000 for the First Half of 2017, compared with $17,752,000 for the First Half of 2016, an increase of $3,716,000. 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 2017, 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 a low interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer-term relatively higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.

The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. 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 and reduce liquidity.

New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.

-27-

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.

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:

June 30, 2017 December 31, 2016
(Dollars in thousands)       Amount       Ratio       Amount       Ratio
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $      226,291      22.98 % $      219,747      22.75 %
Cass Commercial Bank 115,663 16.91 % 110,576 16.72 %
Common Equity Tier I Capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 216,095 21.94 % $ 209,572 21.70 %
Cass Commercial Bank 107,835 15.77 % 102,769 15.54 %
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 216,095 21.94 % $ 209,572 21.70 %
Cass Commercial Bank 107,835 15.77 % 102,769 15.54 %
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 216,095 14.23 % $ 209,572 13.83 %
Cass Commercial Bank 107,835 14.99 % 102,769 13.98 %

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 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.

-28-

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 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, it 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, 2016, 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 June 30, 2017 has changed materially from that at December 31, 2016.

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 Second Quarter of 2017 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, 2016, 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 2016 Annual Report on Form 10-K.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES
None.

-29-


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 Second Quarter of 2017.

 

ITEM 6.

EXHIBITS

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.

-30-

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:  August 4, 2017 By    /s/ Eric H. Brunngraber
  Eric H. Brunngraber
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
 
 
DATE: August 4, 2017 By /s/ P. Stephen Appelbaum
P. Stephen Appelbaum
  Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

-31-

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: August 4, 2017
 

/s/ Eric H. Brunngraber

Eric H. Brunngraber

 

Chairman, President and Chief Executive Officer

 

(Principal Executive Officer)


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: August 4, 2017
  /s/ P. Stephen Appelbaum
P. Stephen Appelbaum
  Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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 June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric H. Brunngraber, Chairman, 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)
August 4, 2017

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.

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 June 30, 2017 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)
August 4, 2017

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.