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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

___________________________

FORM 10-Q

x			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended September 30, 2022
OR
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from __________ to __________

Commission File No. 000-20827

____________________

CASS INFORMATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

(314) 506-5500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbols

Name of each exchange on which registered

Common stock, par value $.50

CASS

The Nasdaq Global Select Market

____________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     x                 No    o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes     x                 No     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

o

Accelerated Filer

x

Non-Accelerated Filer

o

Smaller Reporting Company

o

Emerging Growth Company

o

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 October 22, 2022: Common stock, par value $.50 per share – 13,661,353 shares outstanding.

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Table of Contents

TABLE OF CONTENTS

PART I – Financial Information
Item 1.			FINANCIAL STATEMENTS
			Consolidated Balance Sheets September 30, 2022 (unaudited) and December 31, 2021			3
			Consolidated Statements of Income Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)			4
			Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)			5
			Consolidated Statements of Cash Flows Nine Months Ended September 30, 2022 and 2021 (unaudited)			6
			Consolidated Statements of Shareholders’ Equity Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)			8
			Notes to Consolidated Financial Statements (unaudited)			9
Item 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
Item 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			36
Item 4.			CONTROLS AND PROCEDURES			36
PART II – Other Information – Items 1. – 6.						37
SIGNATURES						38

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 2021 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.

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands except Share and Per Share Data)

			September 30, 2022 (Unaudited)						December 31, 2021
Assets
Cash and due from banks			$	14,799					$	12,301
Short-term investments			332,195						502,627
Cash and cash equivalents			346,994						514,928
Securities available-for-sale, at fair value			763,789						673,453
Loans			1,037,101						960,567
Less: Allowance for credit losses			13,049						12,041
Loans, net			1,024,052						948,526
Payments in advance of funding			269,221						291,427
Premises and equipment, net			19,375						18,113
Investment in bank-owned life insurance			47,714						43,176
Goodwill			17,309						14,262
Other intangible assets, net			4,321						2,564
Other assets			118,040						48,452
Total assets			$	2,610,815					$	2,554,901
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing			$	581,731					$	582,642
Interest-bearing			647,990						638,861
Total deposits			1,229,721						1,221,503
Accounts and drafts payable			1,146,334						1,050,396
Other liabilities			43,025						37,204
Total liabilities			2,419,080						2,309,103
Shareholders’ Equity:
Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued			—						—
Common stock, par value $.50 per share; 40,000,000 shares authorized and 15,505,772 shares issued at September 30, 2022 and December 31, 2021; 13,660,388 and 13,734,295 shares outstanding at September 30, 2022 and December 31, 2021, respectively.			7,753						7,753
Additional paid-in capital			205,624						204,276
Retained earnings			126,361						112,220
Common shares in treasury, at cost (1,845,384 shares at September 30, 2022 and 1,771,477 shares at December 31, 2021)			(81,624)						(78,904)
Accumulated other comprehensive (loss) income			(66,379)						453
Total shareholders’ equity			191,735						245,798
Total liabilities and shareholders’ equity			$	2,610,815					$	2,554,901

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in Thousands except Per Share Data)

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Fee Revenue and Other Income:
Processing fees			$	18,964					$	18,461					$	57,184					$	55,882
Financial fees			11,252						8,624						32,406						23,122
Other			1,568						492						3,275						1,735
Total fee revenue and other income			31,784						27,577						92,865						80,739
Interest Income:
Interest and fees on loans			10,006						8,987						27,890						26,270
Interest and dividends on securities:
Taxable			2,947						731						6,679						1,387
Exempt from federal income taxes			1,551						1,760						4,867						5,331
Interest on federal funds sold and other short-term investments			2,249						241						3,423						515
Total interest income			16,753						11,719						42,859						33,503
Interest Expense:
Interest on deposits			782						287						1,344						915
Total interest expense			782						287						1,344						915
Net interest income			15,971						11,432						41,515						32,588
Provision for (release of) credit losses			550						340						850						(870)
Net interest income after provision for (release of) credit losses			15,421						11,092						40,665						33,458
Total net revenue			47,205						38,669						133,530						114,197
Operating Expense:
Personnel			26,999						23,283						77,750						68,689
Occupancy			970						953						2,801						2,859
Equipment			1,633						1,700						5,004						5,028
Amortization of intangible assets			195						215						485						644
Other operating expense			6,524						4,539						15,748						11,798
Total operating expense			36,321						30,690						101,788						89,018
Income before income tax expense			10,884						7,979						31,742						25,179
Income tax expense			2,085						1,174						6,123						4,277
Net income			$	8,799					$	6,805					$	25,619					$	20,902
Basic earnings per share			$	.65					$	.48					$	1.89					$	1.47
Diluted earnings per share			.64						.48						1.86						1.45

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 September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Comprehensive Income:
Net income			$	8,799					$	6,805					$	25,619					$	20,902
Other comprehensive (loss) income:
Net unrealized loss on securities available-for-sale			(26,127)						(4,438)						(87,159)						(7,086)
Tax effect			6,218						1,057						20,744						1,687
Reclassification adjustments for losses (gains) included in net income			(13)						1						(15)						(44)
Tax effect			3						—						3						10
Foreign currency translation adjustments			(195)						(168)						(405)						(145)
Total comprehensive (loss) income			$	(11,315)					$	3,257					$	(41,213)					$	15,324

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)

			Nine Months Ended September 30,
			2022						2021
Cash Flows From Operating Activities:
Net income			$	25,619					$	20,902
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			8,311						9,340
Gains on sales of securities			(15)						(44)
Stock-based compensation expense			4,479						2,585
Provision for (release of) credit losses			850						(870)
Decrease in deferred income tax asset			—						22
Increase in current income tax liability			641						79
Decrease in pension liability			(1,877)						(1,252)
Increase in accounts receivable			(2,540)						(628)
Other operating activities, net			5,331						546
Net cash provided by operating activities			40,799						30,680
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale			3,838						43,190
Proceeds from maturities of securities available-for-sale			45,740						83,265
Purchase of securities available-for-sale			(231,891)						(322,336)
Net (increase) decrease in loans			(76,521)						19,229
Purchase of bank-owned life insurance			(4,538)						(24,868)
Asset acquisition of Touchpoint			(4,425)						—
Decrease (increase) in payments in advance of funding			22,206						(71,816)
Purchases of premises and equipment, net			(4,270)						(2,697)
Net cash used in investing activities			(249,861)						(276,033)
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits			(911)						(26,184)
Net increase in interest-bearing demand and savings deposits			20,672						67,930
Net decrease in time deposits			(11,543)						(5,285)
Net change in accounts and drafts payable and other customer receivables			50,239						70,099
Cash dividends paid			(11,478)						(11,576)
Purchase of common shares for treasury			(5,299)						(18,975)
Other financing activities, net			(552)						(875)
Net cash provided by financing activities			41,128						75,134
Net decrease in cash and cash equivalents			(167,934)						(170,219)
Cash and cash equivalents at beginning of period			514,928						670,528
Cash and cash equivalents at end of period			$	346,994					$	500,309
Supplemental information:
Cash paid for interest			$	1,314					$	885
Cash paid for income taxes			5,531						4,176

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(Dollars in Thousands except per share data)

			Common Stock						Additional Paid-in Capital						Retained Earnings						Treasury Stock						Accumulated Other Comprehensive Loss						Total
Balance, June 30, 2021			$	7,753					$	203,098					$	105,398					$	(53,437)					$	(2,045)					$	260,767
Net income															6,805																		6,805
Cash dividends ($0.27 per share)															(3,815)																		(3,815)
Issuance of 4,412 common shares pursuant to stock-based compensation plan, net									(51)												134												83
Stock-based compensation expense									1,066																								1,066
Purchase of 314,672 common shares																					(13,715)												(13,715)
Other comprehensive loss																											(3,548)						(3,548)
Balance, September 30, 2021			$	7,753					$	204,113					$	108,388					$	(67,018)					$	(5,593)					$	247,643
Balance, June 30, 2022			$	7,753					$	204,482					$	121,386					$	(81,742)					$	(46,265)					$	205,614
Net income															8,799																		8,799
Cash dividends ($0.28 per share)															(3,824)																		(3,824)
Issuance of 3,487 common shares pursuant to stock-based compensation plan, net									(165)												118												(47)
Stock-based compensation expense									1,307																								1,307
Other comprehensive loss																											(20,114)						(20,114)
Balance, September 30, 2022			$	7,753					$	205,624					$	126,361					$	(81,624)					$	(66,379)					$	191,735

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(Dollars in Thousands except per share data)

			Common Stock						Additional Paid-in Capital						Retained Earnings						Treasury Stock						Accumulated Other Comprehensive Loss						Total
Balance, December 31, 2020			$	7,753					$	204,875					$	99,062					$	(50,515)					$	(15)					$	261,160
Net income															20,902																		20,902
Cash dividends ($.81 per share)															(11,576)																		(11,576)
Issuance of 83,506 common shares pursuant to stock-based compensation plan, net									(2,932)												2,180												(752)
Exercise of SARs									(415)												292												(123)
Stock-based compensation expense									2,585																								2,585
Purchase of 434,938 common shares																					(18,975)												(18,975)
Other comprehensive loss																											(5,578)						(5,578)
Balance, September 30, 2021			$	7,753					$	204,113					$	108,388					$	(67,018)					$	(5,593)					$	247,643
Balance, December 31, 2021			$	7,753					$	204,276					$	112,220					$	(78,904)					$	453					$	245,798
Net income															25,619																		25,619
Cash dividends ($.84 per share)															(11,478)																		(11,478)
Issuance of 80,396 common shares pursuant to stock-based compensation plan, net									(2,803)												2,336												(467)
Exercise of SARs									(328)												243												(85)
Stock-based compensation expense									4,479																								4,479
Purchase of 130,374 common shares																					(5,299)												(5,299)
Other comprehensive loss																											(66,832)						(66,832)
Balance, September 30, 2022			$	7,753					$	205,624					$	126,361					$	(81,624)					$	(66,379)					$	191,735

See accompanying notes to unaudited consolidated financial statements.

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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 notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity. 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, 2021.

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, which requires that intangibles with indefinite useful lives be tested annually for impairment, or when management deems there is a triggering event, and those with finite useful lives be amortized over their useful lives.

In June 2022, the Company acquired the assets of mobile church management software developer Touchpoint, a division of the Pursuant Group, Inc., and recorded intangible assets of $5,289,000. Those intangible assets were valued at $3,046,000 for goodwill, $1,692,000 for the customer list, $368,000 for software, and $183,000 for the trade name. The goodwill is deductible for tax purposes over 15 years, starting in 2022. The intangible assets and results of Touchpoint are included in the Information Services operating segment.

The purchase price of the acquisition consisted of a cash payment of $4,900,000 and potential contingent consideration in the form of an earn out up to $2,500,000. The Company valued the contingent earn out component at $389,000. The fair value of the contingent consideration was estimated on the acquisition date as the present value of the expected future contingent payments which were determined using a Monte Carlo simulation. The contingent consideration is based upon four years of earnings before interest, taxes, depreciation and amortization (EBITDA) subsequent to the acquisition date. Any changes in the estimated fair value of the contingent earn out consideration, up to the contracted amount, will be reflected in the results of operations in future periods as they are identified.

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

			September 30, 2022												December 31, 2021
(In thousands)			Gross Carrying Amount						Accumulated Amortization						Gross Carrying Amount						Accumulated Amortization
Assets eligible for amortization:
Customer lists			$	6,470					$	(4,489)					$	4,778					$	(4,341)
Patents			72						(31)						72						(28)
Software			3,212						(1,401)						2,844						(1,104)
Trade name			373						(35)						190						(22)
Other			500						(350)						500						(325)
Unamortized intangible assets:
Goodwill			17,309						—						14,262						—
Total intangible assets			$	27,936					$	(6,306)					$	22,646					$	(5,820)

The customer lists are amortized over 7 to 10 years; the patents over 18 years; software over 3 to 7 years, the trade name over 10 to 20 years and other intangible assets over 15 years. Amortization of intangible assets amounted to $195,000 and $215,000 for the three month periods ended September 30, 2022 and 2021, respectively. Amortization of intangible assets amounted to $485,000 and $644,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.

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Estimated annual amortization of intangibles is $680,000 in 2022, $780,000 in 2023, $738,000 in 2024, $730,000 in 2025, and $582,000 in 2026.

Note 3 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding. Under the treasury stock method, stock appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the SAR price during a period.

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

(In thousands except share and per share data)			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Basic
Net income			$	8,799					$	6,805					$	25,619					$	20,902
Weighted-average common shares outstanding			13,542,231						14,040,089						13,554,169						14,203,369
Basic earnings per share			$	0.65					$	0.48					$	1.89					$	1.47
Diluted
Net income			$	8,799					$	6,805					$	25,619					$	20,902
Weighted-average common shares outstanding			13,542,231						14,040,089						13,554,169						14,203,369
Effect of dilutive restricted stock and stock appreciation rights			262,106						237,080						252,496						239,016
Weighted-average common shares outstanding assuming dilution			13,804,337						14,277,169						13,806,665						14,442,385
Diluted earnings per share			$	0.64					$	0.48					$	1.86					$	1.45

Note 4 – Stock Repurchases

The Company maintains a treasury stock buyback program pursuant to which, in October 2021, the Board of Directors authorized the repurchase of up to 750,000 shares of the Company’s common stock with no expiration date. As of September 30, 2022, 340,707 shares remained available for repurchase under the program. The Company repurchased 0 and 314,672 shares during the three-month periods ended September 30, 2022 and 2021, and 130,374 and 434,938 shares during the nine-month periods ended September 30, 2022 and 2021, respectively. 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 and processing requirements.

The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations as well as church management and on-line generosity services to faith-based ministries. The Banking Services segment provides banking services primarily to privately held businesses, restaurant franchises, and faith-based ministries and supports the banking needs of the Information Services segment.

The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Management evaluates segment performance based on tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value.

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Substantially all revenue originates from, and all long-lived assets are located within, the United States and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue.

Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Segment interest income is a function of the relative share of average funding sources generated by each segment multiplied by the following rates:

•Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and

•Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets.

Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other.

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

(In thousands)			Information Services						Banking Services						Corporate, Eliminations and Other						Total
Three Months Ended September 30, 2022:
Fee income			$	30,418					$	811					$	555					$	31,784
Interest income*			7,158						8,733						1,273						17,164
Interest expense			—						782						—						782
Intersegment income (expense)			—						1,124						(1,124)						—
Tax-equivalized pre-tax income*			5,605						4,126						1,565						11,296
Goodwill			17,173						136						—						17,309
Other intangible assets, net			4,321						—						—						4,321
Total assets			1,196,399						1,598,519						(184,103)						2,610,815
Average funding sources			1,139,568						949,454						—						2,089,022
Three Months Ended September 30, 2021:
Fee income			$	26,174					$	1,065					$	338					$	27,577
Interest income*			7,108						5,440						(361)						12,187
Interest expense			—						287						—						287
Intersegment income (expense)			—						859						(859)						—
Tax-equivalized pre-tax income*			6,509						2,130						(193)						8,446
Goodwill			14,126						136						—						14,262
Other intangible assets, net			2,779						—						—						2,779
Total assets			1,018,710						1,279,452						(5,176)						2,292,986
Average funding sources			974,091						875,997						—						1,850,088
Nine Months Ended September 30, 2022:
Fee income			$	89,329					$	1,847					$	1,689					$	92,865
Interest income*			20,175						22,478						1,500						44,153
Interest expense			—						1,344						—						1,344
Intersegment income (expense)			—						3,549						(3,549)						—
Tax-equivalized pre-tax income*			20,259						10,418						2,359						33,036
Goodwill			17,173						136						—						17,309
Other intangible assets, net			4,321						—						—						4,321
Total assets			1,196,399						1,598,519						(184,103)						2,610,815
Average funding sources			1,082,449						963,588						—						2,046,037
Nine Months Ended September 30, 2021:
Fee income			$	77,863					$	1,701					$	1,175					$	80,739
Interest income*			18,501						17,754						(1,335)						34,920
Interest expense			—						915						—						915
Intersegment income (expense)			—						2,170						(2,170)						—
Tax-equivalized pre-tax income*			18,477						8,773						(654)						26,596
Goodwill			14,126						136						—						14,262
Other intangible assets, net			2,779						—						—						2,779
Total assets			1,018,710						1,279,452						(5,176)						2,292,986
Average funding sources			906,474						862,142						—						1,768,616

* Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021. The tax-equivalent adjustment was approximately $412,000 and $468,000 for the third quarter of 2022 and 2021, respectively and $1,294,000 and $1,417,000 for the nine months ended September 30, 2022 and 2021, respectively.

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Note 6 – Loans by Type

A summary of loans is as follows:

(In thousands)			September 30, 2022						December 31, 2021
Commercial and industrial			$	539,272					$	450,336
Real estate:
Commercial:
Mortgage			98,088						108,759
Construction			26,284						24,797
Faith-based:
Mortgage			365,584						355,582
Construction			7,853						14,664
Paycheck Protection Program (“PPP”)			—						6,299
Other			20						130
Total loans			$	1,037,101					$	960,567

The following table presents the aging of loans past due by category at September 30, 2022 and December 31, 2021:

			Performing																		Nonperforming
(In thousands)			Current						30-59 Days						60-89 Days						90 Days and Over						Non- accrual						Total Loans
September 30, 2022
Commercial and industrial			$	539,272					$	—					$	—					$	—					$	—					$	539,272
Real estate
Commercial:
Mortgage			98,088						—						—						—						—						98,088
Construction			26,284						—						—						—						—						26,284
Faith-based:
Mortgage			365,584						—						—						—						—						365,584
Construction			7,853						—						—						—						—						7,853
PPP			—						—						—						—						—						—
Other			20						—						—						—						—						20
Total			$	1,037,101					$	—					$	—					$	—					$	—					$	1,037,101
December 31, 2021
Commercial and industrial			$	450,336					$	—					$	—					$	—					$	—					$	450,336
Real estate
Commercial:
Mortgage			108,759						—						—						—						—						108,759
Construction			24,797						—						—						—						—						24,797
Faith-based:
Mortgage			355,582						—						—						—						—						355,582
Construction			14,664						—						—						—						—						14,664
PPP			6,299						—						—						—						—						6,299
Other			130						—						—						—						—						130
Total			$	960,567					$	—					$	—					$	—					$	—					$	960,567

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The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of September 30, 2022 and December 31, 2021:

(In thousands)			Loans Subject to Normal Monitoring1						Performing Loans Subject to Special Monitoring2						Nonperforming Loans Subject to Special Monitoring2						Total Loans
September 30, 2022
Commercial and industrial			$	536,066					$	3,206					$	—					$	539,272
Real estate
Commercial:
Mortgage			97,558						530						—						98,088
Construction			26,284						—						—						26,284
Faith-based:
Mortgage			364,627						957						—						365,584
Construction			7,853						—						—						7,853
Other			20						—						—						20
Total			$	1,032,408					$	4,693					$	—					$	1,037,101
December 31, 2021
Commercial and industrial			$	440,607					$	9,729					$	—					$	450,336
Real estate
Commercial:
Mortgage			108,759						—						—						108,759
Construction			24,797						—						—						24,797
Faith-based:
Mortgage			352,717						2,865						—						355,582
Construction			14,664						—						—						14,664
PPP			6,299						—						—						6,299
Other			130						—						—						130
Total			$	947,973					$	12,594					$	—					$	960,567

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.

The Company had no loans evaluated for expected credit losses on an individual basis as of September 30, 2022 or December 31, 2021. There were no foreclosed loans recorded as other real estate owned as of September 30, 2022 or December 31, 2021. There were no loans considered troubled debt restructurings as of September 30, 2022 or December 31, 2021.

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A summary of the activity in allowance for credit losses (“ACL”) by category for the periods ended September 30, 2022 and December 31, 2021 is as follows:

(In thousands)			C&I						CRE						Faith-based CRE						Construction						Total
Balance at December 31, 2020			$	4,635					$	1,175					$	5,717					$	417					$	11,944
Provision for (release of) credit losses			387						(144)						(48)						(125)						70
Recoveries			12						—						15						—						27
Balance at December 31, 2021			$	5,034					$	1,031					$	5,684					$	292					$	12,041
Provision for (release of) credit losses			919						(129)						259						(53)						996
Recoveries			12						—						—						—						12
Balance at September 30, 2022			$	5,965					$	902					$	5,943					$	239					$	13,049

The provision for credit losses during the period ended September 30, 2022 was primarily driven by growth of the loan portfolio.

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. An allowance for unfunded commitments of $222,000 and $367,000 had been recorded at September 30, 2022 and December 31, 2021, respectively.

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 September 30, 2022, the balances of unfunded commitments, standby and commercial letters of credit were $207,883,000, $13,450,000, and $1,633,000, 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.

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, SARs, restricted stock, restricted stock units and performance awards. The Company may issue shares out of treasury stock for these awards. During the nine months ended September 30, 2022, 62,375 restricted shares, 57,542 performance-based restricted shares, and no SARs were granted under the Omnibus Plan. Stock-based compensation expense for the three months ended September 30, 2022 and 2021 was $1,307,000 and $1,066,000, respectively, and $4,479,000 and $2,585,000 for the nine months ended September 30, 2022 and 2021, respectively.

Restricted Stock

Restricted shares granted to Company employees are amortized to expense over a three-year cliff vesting period, or until vesting occurs upon retirement. 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.

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As of September 30, 2022, the total unrecognized compensation expense related to non-vested restricted shares was $2,239,000, and the related weighted-average period over which it is expected to be recognized is approximately 0.74 years.

Following is a summary of the activity of the Company's restricted stock for the nine months ended September 30, 2022, with total shares and weighted-average fair value:

			Nine Months Ended September 30, 2022
			Shares						Fair Value
Balance at December 31, 2021			165,553						$	44.81
Granted			62,375						39.17
Vested			(23,316)						48.85
Forfeitures			(823)						43.89
Balance at September 30, 2022			203,789						$	42.63

Performance-Based Restricted Stock

The Company has granted three-year performance-based restricted stock (“PBRS”) awards which are contingent upon the Company’s achievement of pre-established financial goals over a three-year cliff vest period. The number of shares issued ranges from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the three-year performance period.

Following is a summary of the activity of the PBRS for the nine months ended September 30, 2022, based on 100% of target value:

			Nine Months Ended September 30, 2022
			Shares						Fair Value
Balance at December 31, 2021			116,543						$	46.79
Granted			57,542						39.58
Vested			(34,066)						49.05
Forfeitures			(1,234)						43.89
Balance at September 30, 2022			138,785						$	43.19

The PBRS that vested during the nine months ended September 30, 2022 were based on the Company's achievement of 52.9% of target financial goals, resulting in the issuance of 18,021 shares of common stock. The outstanding PBRS at September 30, 2022 will vest at scheduled vesting dates and the actual number of shares of common stock issued will range from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the respective three-year performance period.

SARs

There were no SARs granted and no expense recognized during the nine months ended September 30, 2022. Following is a summary of the activity of the Company’s SARs program for the nine months ended September 30, 2022:

			Shares						Weighted- Average Exercise Price						Average Remaining Contractual Term Years						Aggregate Intrinsic Value (In thousands)
Balance at December 31, 2021			117,089						$	34.91					1.21						$	741
Exercised			(23,976)						27.78						—						—
Exercisable at September 30, 2022			93,113						$	36.75					0.65						$	174

There were no non-vested SARs at September 30, 2022.

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Note 9 – Defined Pension Plans

The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers eligible employees. Effective December 31, 2016, the Plan was closed to all new participants. Additionally, the Plan’s benefits were frozen for all remaining participants as of February 28, 2021. As such, subsequent to February 28, 2021, there is no service cost associated with the Plan. 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:

(In thousands)			Estimated 2022						Actual 2021
Service cost – benefits earned during the year			$	—					$	1,002
Interest cost on projected benefit obligations			3,290						3,076
Expected return on plan assets			(5,860)						(6,310)
Net amortization			—						393
Net periodic pension benefit			$	(2,570)					$	(1,839)

The Company recorded a net periodic benefit of $616,000 and $1,847,000 for the three and nine-month periods ended September 30, 2022, respectively, and $678,000 and $1,096,000 for the three and nine-month period ended September 30, 2021, respectively. The net periodic pension benefit increased during the nine-month period ended September 30, 2022 primarily due to the Plan being frozen as of February 28, 2021. The Company made no contributions to the Plan during the nine-month period ended September 30, 2022 and is evaluating the amount of contributions, if any, for the remainder of 2022.

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 2021 and an estimate for 2022:

(In thousands)			Estimated 2022						Actual 2021
Service cost – benefits earned during the year			$	—					$	147
Interest cost on projected benefit obligation			318						291
Net amortization			108						203
Net periodic pension cost			$	426					$	641

Supplemental executive retirement plan costs recorded to expense were $107,000 and $320,000 for the three and nine-month periods ended September 30, 2022, respectively, and $160,000 and $481,000 for the three and nine-month periods ended September 30, 2021, respectively.

Note 10 – Income Taxes

The effective tax rate was 19.2% and 19.3% for the three and nine-month periods ended September 30, 2022, respectively, and 14.7% and 17.0% for the three and nine-month periods ended September 30, 2021, respectively. The effective tax rate for all periods differs from the statutory rate of 21% primarily due to the tax-exempt interest received from municipal bonds and bank-owned life insurance, among other factors. The increase in the effective tax rate for the nine-month period ended September 30, 2022 as compared to the same period of 2021 is primarily a result of taxable income being higher in the current period, which reduces the relative impact of the tax-exempt income.

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

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category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:

			September 30, 2022
(In thousands)			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
State and political subdivisions			$	326,506					$	18					$	28,078					$	298,446
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			210,111						—						31,978						178,133
Corporate bonds			96,405						—						12,614						83,791
U.S. treasury bonds			158,623						—						3,504						155,119
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			50,136						—						1,836						48,300
Total			$	841,781					$	18					$	78,010					$	763,789

			December 31, 2021
(In thousands)			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
State and political subdivisions			$	359,187					$	12,931					$	990					$	371,128
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			170,711						135						2,200						168,646
Corporate bonds			84,538						72						272						84,338
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			49,835						—						494						49,341
Total			$	664,271					$	13,138					$	3,956					$	673,453

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

			September 30, 2022
			Less than 12 months												12 months or more												Total
(In thousands)			Estimated Fair Value						Unrealized Losses						Estimated Fair Value						Unrealized Losses						Estimated Fair Value						Unrealized Losses
State and political subdivisions			$	246,743					$	19,158					$	30,025					$	8,920					$	276,768					$	28,078
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			119,478						18,240						58,655						13,738						178,133						31,978
Corporate bonds			72,280						11,075						6,511						1,539						78,791						12,614
U.S. treasury bonds			155,119						3,504						—						—						155,119						3,504
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			48,300						1,836						—						—						48,300						1,836
Total			$	641,920					$	53,813					$	95,191					$	24,197					$	737,111					$	78,010

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			December 31, 2021
			Less than 12 months												12 months or more												Total
(In thousands)			Estimated Fair Value						Unrealized Losses						Estimated Fair Value						Unrealized Losses						Estimated Fair Value						Unrealized Losses
State and political subdivisions			$	60,083					$	990					$	—					$	—					$	60,083					$	990
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			163,652						2,200						—						—						163,652						2,200
Corporate bonds			55,120						272						—						—						55,120						272
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises			49,341						494						—						—						49,341						494
Total			$	328,196					$	3,956					$	—					$	—					$	328,196					$	3,956

There were 326 securities, or 93% (44 of which for greater than 12 months), in an unrealized loss position as of September 30, 2022. The unrealized losses at September 30, 2022 were primarily attributable to changes in market interest rates after the securities were purchased. There were 101 securities, or 28% (0 of which for greater than 12 months), in an unrealized loss position as of December 31, 2021. At September 30, 2022 and December 31, 2021, the Company had not recorded an allowance for credit losses on securities.

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

			September 30, 2022
(In thousands)			Amortized Cost						Fair Value
Due in 1 year or less			$	65,238					$	64,875
Due after 1 year through 5 years			267,021						260,368
Due after 5 years through 10 years			231,748						203,575
Due after 10 years			277,774						234,971
Total			$	841,781					$	763,789

Proceeds from sales of investment securities classified as available-for-sale were $2,317,000 and $3,838,000 for the three and nine months ended September 30, 2022 and $30,074,000 and $43,190,000 for the three and nine months ended September 30, 2021, respectively. Gross realized gains were $13,000 and $15,000 for the three and nine months ended September 30, 2022. Gross realized losses were $1,000 for the three months ended September 30, 2021 while for the nine months ended September 30, 2021, there were gross realized gains of $44,000. There were no securities pledged to secure public deposits or for other purposes at September 30, 2022.

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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:

			September 30, 2022												December 31, 2021
(In thousands)			Carrying Amount						Fair Value						Carrying Amount						Fair Value
Balance sheet assets:
Cash and cash equivalents			$	346,994					$	346,994					$	514,928					$	514,928
Investment securities			763,789						763,789						673,453						673,453
Loans, net			1,024,052						972,338						948,526						948,701
Accrued interest receivable			7,609						7,609						6,799						6,799
Total			$	2,142,444					$	2,090,730					$	2,143,706					$	2,143,881
Balance sheet liabilities:
Deposits			$	1,229,721					$	1,229,721					$	1,221,503					$	1,221,503
Accounts and drafts payable			1,146,334						1,146,334						1,050,396						1,050,396
Accrued interest payable			46						46						16						16
Total			$	2,376,101					$	2,376,101					$	2,271,915					$	2,271,915

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 credit losses result in a fair 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 Payable - The carrying amount approximates fair value.

Note 13 – Revenue from Contracts with Customers

Revenue is recognized as the obligation to the customer is satisfied. The following is detail of the Company’s revenue from contracts with clients.

Processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

Financial fees – The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

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Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction-based fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

			For the Three Months Ended September 30,												For the Nine Months Ended September 30,
(In thousands)			2022						2021						2022						2021
Fee revenue and other income
In-scope of FASB ASC 606
Processing fees			$	18,964					$	18,461					$	57,184					$	55,882
Financial fees			11,252						8,624						32,406						23,122
Information services payment and processing revenue			30,216						27,085						89,590						79,004
Bank service fees			289						323						1,142						991
Fee revenue (in-scope of FASB ASC 606)			30,505						27,408						90,732						79,995
Other income (out-of-scope of FASB ASC 606)			1,279						169						2,133						744
Total fee revenue and other income			$	31,784					$	27,577					$	92,865					$	80,739

Note 14 – Leases

The Company leases certain premises under operating leases. As of September 30, 2022, the Company had lease liabilities of $9,759,000 and right-of-use assets of $9,435,000. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. Presented within occupancy expense on the Consolidated Statements of Income for the three and nine months ended September 30, 2022, operating lease cost was $386,000 and $1,184,000, respectively, short-term lease cost was $51,000 and $156,000, respectively, and there was no variable lease cost. At September 30, 2022, the weighted-average remaining lease term for the operating leases was 8.4 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.59%. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. See the Company’s 2021 Annual Report on Form 10-K for information regarding these commitments.

A maturity analysis of operating lease liabilities and undiscounted cash flows as of September 30, 2022 is as follows:

(In thousands)			September 30, 2022
Lease payments due
Less than 1 year			$	1,359
1-2 years			1,332
2-3 years			1,339
3-4 years			1,354
4-5 years			1,350
Over 5 years			4,561
Total undiscounted cash flows			11,295
Discount on cash flows			1,536
Total lease liability			$	9,759

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the nine months ended September 30, 2022.

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Note 15 – Subsequent Events

In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated subsequent events after the consolidated balance sheet date of September 30, 2022. 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, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, Breda, Netherlands, Basingstoke, United Kingdom, and Singapore. 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 waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass solutions include a B2B payment platform for clients that require an agile fintech partner. Additionally, the Company offers an on-line platform to provide generosity services for faith-based and non-profit organizations. The Company’s bank subsidiary, the “Bank,” supports the Company’s payment operations. The Bank also provides banking services to its target markets, which include privately-owned businesses and faith-based ministries in the St. Louis metropolitan area as well as other selected cities in the United States.

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. The Company also earns financial fees on a transaction level basis for invoice payment services when making customer payments. Financial fees include interchange revenue, foreign exchange fees and fees received through early payment of invoices. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. 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, advances to payees, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services.

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2021 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. The cost of fuel is another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.

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 Accounting Standards Codification. 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

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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. The accounting policy that requires significant management estimates and is deemed critical to the Company’s results of operations or financial position has been discussed with the Audit Committee of the Board of Directors and is described below.

Allowance for Credit Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses. 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 Credit Losses and Allowance for Unfunded Commitments” section of this report.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended September 30, 2022 (“Third Quarter of 2022”) compared to the three-month period ended September 30, 2021 (“Third Quarter of 2021”) and the nine-month period ended September 30, 2022 (“Nine Months Ended 2022”) compared to the nine-month period ended September 30, 2021 (“Nine Months Ended 2021”).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 2021 Annual Report on Form 10-K. Results of operations for the Third Quarter of 2022 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:

(In thousands except per share data)			Third Quarter of																		Nine Months Ended
			2022						2021						% Change						2022						2021						% Change
Net income			$	8,799					$	6,805					29.3		%				$	25,619					$	20,902					22.6		%
Diluted earnings per share			$	.64					$	.48					33.3		%				1.86						1.45						28.3		%
Return on average assets			1.33		%				1.14		%				—						1.32		%				1.23		%				—		%
Return on average equity			16.84		%				10.61		%				—						15.80		%				10.84		%				—		%

Key profitability metrics were up during the three and nine months ended September 30, 2022 driven by significant revenue growth in financial fees and net interest income. Partially offsetting the revenue growth was an increase in operating expenses as more fully described below.

Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and facility processing and financial 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

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generate interest income. In addition, the Company's fee revenue consists of financial fees which are generated through the payment process. Processing volumes, average payments in advance of funding, and fee revenue were as follows:

(In thousands)			Third Quarter of																		Nine Months Ended
			2022						2021						% Change						2022						2021						% Change
Transportation invoice volume			9,385						9,333						0.6		%				27,633						27,581						0.2		%
Transportation invoice dollar volume			$	11,549,980					$	9,540,408					21.1		%				$	33,818,573					$	26,385,936					28.2		%
Facility-related transaction volume 1			3,315						3,104						6.8		%				9,794						9,351						4.7		%
Facility-related dollar volume 2			$	5,485,783					$	4,215,044					30.1		%				$	14,699,903					$	11,590,437					26.8		%
Average payments in advance of funding			$	277,683					$	213,922					29.8		%				$	283,431					$	196,492					44.2		%
Processing fees			$	18,964					$	18,461					2.7		%				$	57,184					$	55,882					2.3		%
Financial fees			$	11,252					$	8,624					30.5		%				$	32,406					$	23,122					40.2		%

1.Facility expense transaction volumes have been restated for the current and prior periods to reflect total invoices processed. In prior periods, billing account numbers were utilized for the telecom division as a proxy for transactions.

2.Includes energy, telecom and environmental.

Third Quarter of 2022 compared to Third Quarter of 2021:

Processing fee revenue increased $503,000, or 2.7%, primarily attributable to the increase in transportation and facility-related transaction volumes of 0.6% and 6.8%, respectively.

Financial fee revenue increased $2,628,000, or 30.5%, primarily attributable to the 21.1% and 30.1% increases in transportation and facility-related dollar volumes, respectively. The increase in dollar volumes contributed to a 29.8% increase in average payments in advance of funding, which is a significant driver of financial fee revenue. The significant increase in transportation invoice dollar volume was driven by inflationary pressures, supply chain disruptions and fuel surcharges, among other factors. Facility-related invoices increased 6.8%, while dollar volume increased 30.1%. The increase in facility-related dollar volume was largely due to an increase in energy prices.

Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021:

Processing fee revenue increased $1,302,000, or 2.3%, primarily attributable to the increase in transportation and facility-related transaction volumes of 0.2% and 4.7%, respectively.

Financial fee revenue increased $9,284,000, or 40.2%, primarily attributable to the 28.2% and 26.8% increases in transportation and facility-related dollar volumes, respectively. The increase in dollar volumes contributed to a 44.2% increase in average payments in advance of funding.

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Net Interest Income

Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors:

(In thousands)			Third Quarter of																		Nine Months Ended
			2022						2021						% Change						2022						2021						% Change
Average earnings assets			$	2,243,219					$	2,036,296					10.2		%				$	2,196,704					$	1,965,976					11.7		%
Average interest-bearing liabilities			597,469						600,263						(0.5)		%				598,812						583,478						2.6		%
Net interest income*			16,383						11,900						37.7		%				42,809						34,005						25.9		%
Net interest margin*			2.90		%				2.32		%										2.61		%				2.31		%
Yield on earning assets*			3.04		%				2.37		%										2.69		%				2.37		%
Rate on interest-bearing liabilities			0.52		%				0.19		%										0.30		%				0.21		%

*Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021.

Third Quarter of 2022 compared to Third Quarter of 2021:

Average earning assets increased $206,923,000, or 10.2%. The overall increase in average interest-earning asset balances was primarily due to increases in average investments and loans, partially offset by a decrease in average short-term investments.

Average investment securities increased $309,866,000, or 59.9%, as cash provided by increases in funding sources was utilized to purchase investment securities. The average yield on taxable investment securities increased 73 basis points to 2.11% as a result of the increase in short and long-term interest rates. The average yield on tax-exempt investment securities declined two basis points to 2.85%. These securities are longer term fixed rate and do not reprice as quickly in a rising interest rate environment. The Company has not purchased tax-exempt investment securities during the first nine months of 2022.

Average loans increased $111,034,000 as organic growth in franchise, faith-based and other commercial and industrial loans more than offset a $36,254,000 reduction in average PPP loans. The average yield on loans declined 5 basis points to 4.03% primarily due to a $812,000 decrease in PPP loan fees, partially offset by the increase in short-term interest rates that began in March 2022 and continued through September 2022. Excluding the impact of the PPP loan fees, the average yield on loans increased 32 basis points.

The average balance of short-term investments decreased $213,977,000, or 33.1%, as available funds were deployed into investment securities and loans. The average yield on short-term investments increased 192 basis points to 2.07% primarily due to the increase in short-term interest rates that began in March 2022.

The average balance of interest-bearing deposits decreased $2,795,000, or 0.5% due to a decrease in average time deposits. The average rate paid on interest-bearing deposits increased 33 basis points to 0.52% due to the increase in short-term interest rates.

Average demand deposits increased $133,756,000, or 29.5%. The increase was driven by significant liquidity in the economy resulting in higher deposit balances.

Average accounts and drafts payable increased $171,732,000, or 17.0%. The increase in average accounts and drafts payable was primarily driven by inflationary pressures, fuel surcharges, and increased energy prices, which continue to drive prices higher.

Tax-equivalent net interest income increased $4,483,000, or 37.7%, compared to the same period in the prior year driven by the 10.2% increase in average interest-earning assets and 58 basis point increase in the net interest margin from 2.32% to 2.90%. The increase in the net interest margin was driven by the increase in short-term interest rates which positively impacts the Company's net interest margin over time as average interest-earning assets of $2,243,219,000 greatly exceed average interest-bearing liabilities of $597,469,000.

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Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021:

Average earning assets increased $230,728,000, or 11.7%. The overall increase in average interest-earning asset balances was primarily due to increases in average investments and loans, partially offset by a decrease in average short-term investments.

Average investment securities increased $318,143,000, or 70.0%. The average yield on taxable investment securities increased 59 basis points to 1.83% as a result of the increase in short and long-term interest rates. The average yield on tax-exempt investment securities declined six basis points to 2.90%.

Average loans increased $87,424,000, or 9.9%. The average yield on loans declined 14 basis points to 3.83% primarily due to a $2,155,000 decrease in PPP loan fees, partially offset by the increase in short-term interest rates that began in March 2022. Excluding the impact of the PPP loan fees, the average yield on loans increased 19 basis points.

Average short-term investments decreased $174,839,000, or 27.9%, as available funds were deployed into investment securities and loans. The average yield on short-term investments increased 90 basis points to 1.01% primarily due to the increase in short-term interest rates that began in March 2022.

The average balance of interest-bearing deposits increased $15,334,000, or 2.6% due to an increase in interest-bearing demand deposits. The average rate paid on interest-bearing deposits increased 9 basis points to 0.30% due to the increase in short-term interest rates.

Average demand deposits increased $164,488,000, or 38.2%. The increase was driven by significant liquidity in the economy resulting in higher deposit balances.

Average accounts and drafts payable increased $182,926,000, or 19.2%. The increase in average accounts and drafts payable was primarily driven by inflationary pressures, fuel surcharges, and increased energy prices, which continue to drive prices higher.

Tax-equivalent net interest income increased $8,804,000, or 25.9%, compared to the same period in the prior year driven by the 11.7% increase in average interest-earning assets and 30 basis point increase in the net interest margin from 2.31% to 2.61%. The increase in the net interest margin was driven by the increase in short-term interest rates which positively impacts the Company's net interest margin over time as average interest-earning assets of $2,196,704,000 greatly exceed average interest-bearing liabilities of $598,812,000.

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 for each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.

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(In thousands)			Third Quarter of 2022																		Third Quarter of 2021
			Average  Balance						Interest  Income/  Expense						Yield/  Rate						Average  Balance						Interest  Income/  Expense						Yield/  Rate
Assets1
Interest-earning assets
Loans2:
Taxable			$	984,104					$	10,005					4.03		%				$	873,070					$	8,987					4.08		%
Investment securities3:
Taxable			554,315						2,948						2.11		%				209,662						731						1.38		%
Tax-exempt4			273,284						1,963						2.85		%				308,071						2,228						2.87		%
Short-term investments			431,516						2,249						2.07		%				645,493						241						0.15		%
Total interest-earning assets			2,243,219						17,165						3.04		%				2,036,296						12,187						2.37		%
Non-interest-earning assets
Cash and due from banks			19,084																		18,778
Premises and equipment, net			19,515																		17,718
Bank-owned life insurance			47,546																		28,134
Goodwill and other intangibles			21,745																		17,167
Payments in advance of funding			277,682																		213,922
Other assets			1,602																		52,412
Allowance for credit losses			(12,579)																		(11,183)
Total assets			$	2,617,814																	$	2,373,244
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
Interest-bearing demand deposits			$	545,539					$	701					0.51		%				$	531,541					$	145					0.11		%
Savings deposits			13,547						12						0.35		%				17,767						2						0.04		%
Time deposits >= $100			16,325						37						0.90		%				19,403						49						1.00		%
Other time deposits			22,047						32						0.58		%				31,542						91						1.14		%
Total interest-bearing deposits			597,458						782						0.52		%				600,253						287						0.19		%
Short-term borrowings			11						—						—		%				10						—						—		%
Total interest-bearing liabilities			597,469						782						0.52		%				600,263						287						0.19		%
Non-interest bearing liabilities
Demand deposits			586,872																		453,116
Accounts and drafts payable			1,182,373																		1,010,641
Other liabilities			43,852																		54,703
Total liabilities			2,410,566																		2,118,723
Shareholders’ equity			207,248																		254,521
Total liabilities and shareholders’ equity			$	2,617,814																	$	2,373,244
Net interest income									$	16,383																	$	11,900
Net interest margin															2.90		%																2.32		%
Interest spread															2.52		%																2.18		%

1.Balances shown are daily averages.

2.Interest income on loans includes net loan fees of $99,000 and $969,000 for the third quarter of 2022 and 2021, respectively. The decrease in net loan fees is due to higher PPP fees in 2021.

3.For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

4.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021. The tax-equivalent adjustment was approximately $412,000 and $468,000 for the third quarter of 2022 and 2021, respectively.

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(In thousands)			Nine Months Ended 2022																		Nine Months Ended 2021
			Average  Balance						Interest  Income/  Expense						Yield/  Rate						Average  Balance						Interest  Income/  Expense						Yield/  Rate
Assets1
Interest-earning assets
Loans2:
Taxable			$	972,698					$	27,890					3.83		%				$	885,274					$	26,270					3.97		%
Investment securities3:
Taxable			488,257						6,679						1.83		%				149,953						1,387						1.24		%
Tax-exempt4			284,187						6,161						2.90		%				304,348						6,748						2.96		%
Short-term investments			451,562						3,423						1.01		%				626,401						515						0.11		%
Total interest-earning assets			2,196,704						44,153						2.69		%				1,965,976						34,920						2.37		%
Non-interest-earning assets:
Cash and due from banks			20,304																		19,890
Premises and equipment, net			19,192																		17,877
Bank-owned life insurance			46,009																		21,286
Goodwill and other intangibles			18,887																		17,381
Payments in advance of funding			283,430																		196,492
Other assets			15,583																		52,142
Allowance for credit losses			(12,349)																		(11,615)
Total assets			$	2,587,760																	$	2,279,429
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities:
Interest-bearing demand deposits			$	542,378					$	1,102					0.27		%				$	510,886					$	431					0.11		%
Savings deposits			14,628						17						0.16		%				19,098						7						0.05		%
Time deposits >= $100			17,054						115						0.90		%				22,231						200						1.20		%
Other time deposits			24,741						110						0.59		%				31,253						277						1.18		%
Total interest-bearing deposits			598,801						1,344						0.30		%				583,468						915						0.21		%
Short-term borrowings			11						—						—		%				10						—						—		%
Total interest-bearing liabilities			598,812						1,344						0.30		%				583,478						915						0.21		%
Non-interest bearing liabilities:
Demand deposits			594,994																		430,506
Accounts and drafts payable			1,135,673																		952,747
Other liabilities			41,454																		54,935
Total liabilities			2,370,933																		2,021,666
Shareholders’ equity			216,827																		257,763
Total liabilities and shareholders’ equity			$	2,587,760																	$	2,279,429
Net interest income									$	42,809																	$	34,005
Net interest margin															2.61		%																2.31		%
Interest spread															2.39		%																2.17		%

1.Balances shown are daily averages.

2.Interest income on loans includes net loan fees of $500,000 and $2,738,000 for the nine months ended September 30, 2022 and 2021, respectively. The decrease in net loan fees is due to higher PPP fees in 2021.

3.For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

4.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both the nine months ended September 30, 2022 and 2021. The tax-equivalent adjustment was approximately $1,294,000 and $1,417,000 for the nine months ended September 30, 2022 and 2021, respectively.

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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.

(In thousands)			Third Quarter of 2022 Compared to Third Quarter of 2021
			Volume						Rate						Total
Increase (decrease) in interest income:
Loans1:
Taxable			$	1,130					$	(112)					$	1,018
Investment securities:
Taxable			1,680						537						2,217
Tax-exempt2			(250)						(15)						(265)
Short-term investments			(106)						2,114						2,008
Total interest income			2,454						2,524						4,978
Interest expense on:
Interest-bearing demand deposits			4						552						556
Savings deposits			(1)						11						10
Time deposits >=$100			(7)						(5)						(12)
Other time deposits			(22)						(37)						(59)
Total interest expense			(26)						521						495
Net interest income			$	2,480					$	2,003					$	4,483

1.Interest income includes net loan fees.

2.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the three months ended September 30, 2022 and 2021.

(In thousands)			Nine Months Ended 2022 Compared to Nine Months Ended of 2021
			Volume						Rate						Total
Increase (decrease) in interest income:
Loans1:
Taxable			$	2,529					$	(909)					$	1,620
Investment securities:
Taxable			4,365						927						5,292
Tax-exempt2			(440)						(147)						(587)
Short-term investments			(183)						3,091						2,908
Total interest income			6,271						2,962						9,233
Interest expense on:
Interest-bearing demand deposits			28						643						671
Savings deposits			(2)						12						10
Time deposits >=$100			(41)						(44)						(85)
Other time deposits			(49)						(118)						(167)
Total interest expense			(64)						493						429
Net interest income			$	6,335					$	2,469					$	8,804

1.Interest income includes net loan fees.

2.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the three months ended September 30, 2022 and 2021.

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Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments

The Company recorded a provision for credit losses and off-balance sheet credit exposures of $550,000, and $340,000 in the Third Quarter of 2022 and 2021, respectively. The Company recorded a provision for credit losses and off-balance sheet credit exposures of $850,000, and release of credit losses of $870,000 in the Nine Months Ended 2022 and 2021, respectively. The amount of the provision for (release of) credit losses is derived from the Company’s quarterly Current Expected Credit Loss (“CECL”) model. The amount of the provision for (release of) credit losses will fluctuate as determined by these quarterly analyses. The provision for credit losses in the Third Quarter of 2022 and the Nine Months Ended 2022 was driven by loan growth and external economic factors, including the reduction in the forecast of Gross Domestic Product.

The Company experienced no net loan recoveries in the Third Quarter of 2022 and $11,000 in the Third Quarter of 2021. There were $12,000 net loan recoveries in the Nine Months Ended 2022 and $28,000 in the Nine Months Ended 2021. The ACL was $13,049,000 at September 30, 2022 compared to $12,041,000 at December 31, 2021. The ACL represented 1.26% of outstanding loans at September 30, 2022 and 1.25% of outstanding loans at December 31, 2021. The allowance for unfunded commitments was $222,000 at September 30, 2022 and $367,000 at December 31, 2021. There were no nonperforming loans outstanding at September 30, 2022 or December 31, 2021.

The ACL has been established and is maintained to estimate the lifetime expected credit losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans. For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value.

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

Summary of Credit Loss Experience

The following table presents information on the Company's provision for (release of) credit losses and analysis of the ACL:

			Third Quarter of												Nine Months Ended
(In thousands)			2022						2021						2022						2021
Allowance for credit losses at beginning of period			$	12,573					$	11,171					$	12,041					$	11,944
Provision for (release of) credit losses			476						350						996						(440)
Loans charged off			—						—						—						—
Recoveries on loans previously charged off			—						11						12						28
Net recoveries			—						11						12						28
Allowance for credit losses at end of period			$	13,049					$	11,532					$	13,049					$	11,532
Allowance for unfunded commitments at beginning of Period			$	147					$	147					$	367					$	567
Provision for (release of) credit losses			75						(10)						(145)						(430)
Allowance for unfunded commitments at end of period			$	222					$	137					222						137
Loans outstanding:
Average			$	984,104					$	873,070					$	972,697					$	885,274
September 30			1,037,101						872,905						1,037,101						872,905
Ratio of ACL to loans outstanding:
Average			1.33		%				1.32		%				1.34		%				1.30		%
September 30			1.26		%				1.32		%				1.26		%				1.32		%

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Operating Expenses

Total operating expenses for the Third Quarter of 2022 increased $5,631,000, or 18.3%, compared to the Third Quarter of 2021. Total operating expenses for the Nine Months Ended 2022 increased $12,770,000, or 14.3%, compared to the Nine Months Ended 2021. The following table details the components of operating expenses:

(In thousands)			Third Quarter of									Nine Months Ended
			2022						2021			2022						2021
Personnel			$	26,999					$	23,283		$	77,750					$	68,689
Occupancy			970						953			2,801						2,859
Equipment			1,633						1,700			5,004						5,028
Amortization of intangible assets			195						215			485						644
Other operating			6,524						4,539			15,748						11,798
Total operating expense			$	36,321					$	30,690		$	101,788					$	89,018

Third Quarter of 2022 compared to Third Quarter of 2021:

Personnel costs increased $3,716,000, or 16.0%. Base salaries increased as a result of merit increases, wage pressures, an increase in average full-time equivalent employees of 7.5% due to the Touchpoint acquisition and strategic investments in various technology initiatives, including improved rating engine capabilities and investment in optical character recognition, artificial intelligence, machine learning and other processes to read images and produce data. Also driving the increase in personnel expense were increases in stock compensation and profit sharing of $241,000 and $448,000, respectively, due to improved Company earnings.

Other operating expenses increased $1,985,000, or 43.7%. These expenses increased due to higher levels of travel, employee procurement, data processing and other professional fees. Partially causing the increase in data processing and other professional fees is investments in technology initiatives, resulting in elevated expense levels as multiple technology platforms are being maintained prior to switching over to what the Company believes will be more efficient technology platforms for facility and freight data entry processing by the end of 2023.

Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021:

Personnel costs increased $9,061,000, or 13.2%. Base salaries increased as a result of merit increases, wage pressures, an increase in average full-time equivalent employees of 3.8% due to the Touchpoint acquisition and strategic investments in various technology initiatives as described above. Also driving the increase in personnel expense were increases in stock compensation and profit sharing of $1,894,000 and $1,061,000, respectively, due to improved Company earnings.

Other operating expenses increased $3,950,000, or 33.5%. These expenses increased due to higher levels of travel, employee procurement, data processing and other professional fees as described above.

Financial Condition

Total assets at September 30, 2022 were $2,610,815,000, an increase of $55,914,000, or 2.2%, from December 31, 2021.

The Company experienced a decrease in cash and cash equivalents of $167,934,000, or 32.6%. The change in cash and cash equivalents reflects the Company’s daily liquidity position and is primarily affected by changes in funding sources, mainly accounts and drafts payable and deposits, cash flows in and out of loans, investments securities and payments in advance of funding. The decrease in cash and cash equivalents was primarily due to growth in loans and investment securities, which utilized cash to fund such growth.

The investment securities portfolio increased $90,336,000, or 13.4%, during the first nine months of 2022. Cash and cash equivalents were utilized to purchase U.S. treasury bonds, which increased from $0 at December 31, 2021 to $155,119,000 at September 30, 2022. The Company purchased U.S. treasury bonds with maturities between one and two years.

Loans increased $76,534,000, or 8.0%. The Company experienced $88,936,000 of growth in commercial and industrial loans due to growth in restaurant franchise loans and investment grade leases.

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Payments in advance of funding decreased $22,206,000, or 7.6%. The decrease in the balance is primarily due to timing as average balances are higher for the three and nine months ended September 30, 2022 as compared to the same periods in 2021.

Other assets increased $69,588,000 due to an increase in the deferred tax asset of $20,747,000 as a result of unrealized losses on investment securities and an increase in accounts receivable from customers of $45,699,000.

Total liabilities at September 30, 2022 were $2,419,080,000, an increase of $109,977,000, or 4.8%, from December 31, 2021.

Total deposits at September 30, 2022 were $1,229,721,000, an increase of $8,218,000, or 0.7%, from December 31, 2021. Increases in demand deposits have offset declines in time deposits.

Accounts and drafts payable at September 30, 2022 were $1,146,334,000, an increase of $95,938,000, or 9.1%, from December 31, 2021. 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).

Total shareholders’ equity at September 30, 2022 was $191,735,000, a $54,063,000, or 22.0%, decrease from December 31, 2021. Total shareholders’ equity decreased due to a change in accumulated other comprehensive loss of $66,832,000 as a result of interest rates continuing to rise and the negative impact on the fair value of existing investment securities, share repurchases of $5,299,000, and dividends paid of $11,478,000. These decreases were partially offset by net income of $25,619,000 and stock-based compensation expense of $4,479,000.

Liquidity and Capital Resources

The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources.

The 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 money market funds. Cash and cash equivalents totaled $346,994,000 at September 30, 2022, a decrease of $167,934,000, or 32.6%, from December 31, 2021. At September 30, 2022, these assets represented 13.3% 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 securities were $763,789,000 at September 30, 2022, an increase of $90,336,000 from December 31, 2021. These assets represented 29.3% of total assets at September 30, 2022. Of the total portfolio, 8.5% mature in one year, 34.1% mature in one to five years, and 57.4% mature in five or more years.

The Bank has unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83,000,000 in aggregate. As of September 30, 2022, the Bank also has secured lines of credit with the Federal Home Loan Bank of $228,858,000 collateralized by mortgage loans. The Company also has secured lines of credit from two banks up to a maximum of $150,000,000 collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of September 30, 2022 or December 31, 2021.

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 $18,220,000 of CDARS deposits and interest-bearing demand deposits include $117,993,000 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.

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Net cash flows provided by operating activities were $40,799,000 for the nine months ended September 30, 2022, compared to $30,680,000 for the nine months ended September 30, 2021, an increase of $10,119,000. 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 2022, which are estimated to range from $4 million to $6 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. Lower levels of economic activity, such as those previously experienced by the Company as a result of COVID-19 and governmental actions related thereto, decrease both fee income and balances of accounts and drafts payable.

The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income.

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

As a bank holding company, the Company and the Bank are subject to capital requirements pursuant to the FRB’s capital guidelines which include (i) risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and account for off-balance sheet exposure; (ii) guidelines that consider market risk, which is the risk of loss due to change in value of assets and liabilities due to changes in interest rates; and (iii) guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may leverage its equity capital base.

The Basel III Capital Rules require banking organizations, like Cass, to maintain:

•a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer;

•a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;

•a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and

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•a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.

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 credit losses limited to a maximum of 1.25% of risk-weighted assets and, for non-advanced approaches institutions like Cass that have exercised a one-time opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), 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.

The calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. For instance, the Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to common equity Tier 1 capital. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from Tier 1 capital to the extent that any one such category exceeds 25% of common equity Tier 1 capital.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

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

			September 30, 2022												December 31, 2021
(Dollars in thousands)			Amount						Ratio						Amount						Ratio
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.			$	248,833					14.07		%				$	240,265					14.86		%
Cass Commercial Bank			183,264						16.08		%				174,614						17.21		%
Common equity tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.			$	235,784					13.33		%				$	228,224					14.11		%
Cass Commercial Bank			170,532						14.96		%				163,030						16.07		%
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.			$	235,784					13.33		%				$	228,224					14.11		%
Cass Commercial Bank			170,532						14.96		%				163,030						16.07		%
Tier I capital (to leverage assets)
Cass Information Systems, Inc.			$	235,784					9.08		%				$	228,224					9.21		%
Cass Commercial Bank			170,532						10.44		%				163,030						11.05		%

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

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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

There are no new accounting pronouncements that are applicable to the company and/or materially impact the Company.

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, 2021, 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 following table summarizes simulated changes in net interest income versus unchanged rates over the next 12 months as of September 30, 2022 and December 31, 2021.

			% change in projected net interest income
						September 30, 2022						December 31, 2021
+200 basis points						13.1		%				20.6		%
+100 basis points						5.5		%				10.2		%
Flat rates						—		%				—		%
-100 basis points						(2.5)		%				(2.5)		%
-200 basis points						(11.9)		%				N/M

The decrease in projected net interest income in a rising interest rate environment from December 31, 2021 to September 30, 2022 is primarily due to the purchase of $155,119,000 in U.S. treasury bonds throughout the first nine months of 2022. These bonds mature over a one to two year period and were purchased utilizing available liquid cash and cash equivalents.

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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.

There were no changes in the Third Quarter of 2022 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).

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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, 2021, 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 2021 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a)None.

(b)There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the Third Quarter of 2022.

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. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES

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

			CASS INFORMATION SYSTEMS, INC.
DATE: November 7, 2022			By			/s/ Eric H. Brunngraber
						Eric H. Brunngraber
						Chairman and Chief Executive Officer
						(Principal Executive Officer)
DATE: November 7, 2022			By			/s/ Michael J. Normile
						Michael J. Normile
						Executive Vice President and Chief Financial Officer
						(Principal Financial and Accounting Officer)

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