What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 146 added, 188 removed, 400 unchanged (46% of the section changed)

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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.

In general, however, Cass is compensated for its processing services through service fees, transactional level payment services, and investment of account balances

generated during the payment process.

The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed.

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.

Transactional level payment services and interest income from the balances generated during the payment processing cycle are affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed.

Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management.

Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income.

The funds generated by these processing activities are invested in overnight investments, investment

grade securities, advances to payees, and loans generated by the Bank.

The 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.

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As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.

In 2021, total fee revenue and other income increased $9,251,000, or 9%, net interest income after provision for credit losses decreased $59,000, total operating expenses increased $5,711,000, or 5%, and net income increased $3,428,000, or 14%.

This performance in 2021 rebounded from 2020, which was more severely impacted by the COVID-19 global pandemic.

For payment processing services, dollar volumes experienced a significant increase during 2021 which contributed to the increase in total fee revenue and other income.

The Federal Reserve’s actions to lower the Federal Funds rate during the first quarter of 2020 adversely impacted net interest income.

However, an increase in interest-earning assets, specifically in loans and investment securities, were able to mostly offset the impact of a lower interest rate environment and resulting lower net interest margin.

Total operating expenses increased as a higher number of transactions processed had a corresponding rise in personnel and other expenses.

The asset quality of the Company’s loans and investments as of December 31, 2021 remained strong.

The Company recorded revenue of $182.5 million in 2022, up 18.4% from the prior year, primarily due to an increase in transportation and facility dollar volumes processed and rising interest rates.

Net income was $34.9 million, and diluted EPS was $2.53 per share, increases of 22.0% and 26.5% from the prior year, respectively.

The Company continues to operate profitably, posting a 1.35% return on average assets and 16.53% return on average equity.

The Company’s common equity Tier 1 capital ratio was 12.80% at December 31, 2022, significantly exceeding regulatory requirements.

In addition, the Company has maintained exceptional credit quality with non-performing loans to total loans of 0.11% at December 31, 2022 and no loan charge-offs during the year ended December 31, 2022.

The Company’s solid capital and liquidity positions, combined with ongoing earnings, are expected to continue to allow for investment in strategic opportunities when they become available, in addition to return of capital to shareholders.

The Company delivered $20.7 million in dividend payments and share repurchases during 2022.

The Company continues to invest in the technology, processes, and people required to support its multi-national customer base.

Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base.

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The process combines many factors:

economic factors, historical credit loss experience, of both the Company and similar peer banks, loan portfolio growth and concentrations, asset quality, lending management experience and risk tolerance, and other qualitative and quantitative factors which could affect future credit loss.

economic factors, historical credit loss experience, of both the Company and similar peer banks, loan portfolio growth and concentrations, asset quality, risk tolerance, and other qualitative and quantitative factors which could affect future credit loss.

Given the Company's recent historical loss experience, the impact of the qualitative risk factors related to the collective ACL is a substantial percentage of the overall ACL.

Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses, and therefore the appropriateness of the ACL, could change significantly.

It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may

not occur at the same rate and may not be consistent across all loan types.

Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

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The impact and associated risks related to these policies on the Company’s business operations are discussed in the Note 1 "Summary of Significant Accounting Policies" and Note 4 "Loans," as well as the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.

Impact of COVID-19 on the Company’s Business

During the year ended December 31, 2020, the effects of COVID-19 and related actions to attempt to control its spread significantly impacted the global economy and adversely affected the Company’s operating results in both the Information Services and Banking Services segments.

Substantial progress has been made to combat the spread of COVID-19, and financial results for the year-ended December 31, 2021 were driven, in part, by the continual improvement in economic conditions as compared to the same period in 2020, when the negative economic impact of the COVID-19 pandemic was most pronounced on Cass and its customers.

Though macroeconomic conditions continue to trend positive as of December 31, 2021, the Company could experience future negative effects on its business, financial condition, results of operations, and cash flows if there continue to be significant outbreaks of COVID-19.

Information Services

With the spread of COVID-19 to the U.S.

in the first quarter of 2020, many state and local governments recommended or mandated limitations on crowd size, closures of businesses and shelter-in-place orders in order to slow the transmission.

The extent and nature of government actions varied during fiscal years 2020 and 2021 based upon the then-current extent and severity of the COVID-19 pandemic within the respective localities.

Severe business disruptions, resulting constrictions in the manufacturing sector for most of 2020 and into the first quarter of 2021, labor force shortages, decreased oil demand and prices and general economic uncertainty, significantly and adversely impacted the Company’s customers’ business operations and had a corresponding negative affect on the Company’s revenue generation in each sector of the Company’s Information Services segment.

The Federal Reserve also took action to lower the Federal Funds rate in connection with COVID-19 relief, adversely affecting the Company’s net interest income and operating results tied to Banking Services.

However, as vaccines for combatting Covid-19 became widely available in the United States in the first half of 2021 and the economy began to improve, consumer demand for products and services rebounded.

Companies critical to the global supply chain, such as those in warehousing and transporting services, continued to experience the negative effects of the pandemic-related disruptions.

As a result, carrier supply scarcity led to higher transportation costs and an increase in the Company’s transportation payment and processing fee revenues in fiscal 2021.

Banking Services

Like all banks and bank holding companies, the Company’s Banking Services segment has been especially impacted by instability in the global capital markets due to the COVID-19 pandemic.

The Federal Reserve also took action to lower the Federal Funds rate to near zero levels in connection with COVID-19 relief, adversely affecting the Company’s net interest income and operating results tied to Banking Services.

During 2020 and into the first half of 2021, Bank regulatory agencies and various governmental authorities urged financial institutions to work prudently with borrowers who were unable to meet their contractual payment obligations because of the effects of COVID-19.

Accordingly, and in coordination with its primary regulators, the Company deferred borrower principal payments on loans, on an as needed basis, for periods of up to six months.

There were no borrowers remaining on deferred terms at December 31, 2021.

In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was adopted on March 27, 2020.

The CARES Act provided for an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.

Among other things, the CARES Act established the Paycheck Protection Program (“PPP”), which allowed entities to apply for low-interest private loans to fund payroll and other costs which, subject to certain conditions and qualifications, are partially or fully forgivable.

In March 2021, the American Rescue Plan Act of 2021 was enacted, which among other things, provided for additional funding and expansion of the PPP.

In support of the CARES Act, the Bank processed nearly 350 applications for PPP loans of approximately $170,000,000 during the year ended December 31, 2020 and an additional 110 applications for approximately $40,000,000 during the year-ended December 31, 2021 to provide much-needed cash to small business and self-employed taxpayers during the COVID-19 crisis.

The loans were primarily made to existing bank customers and are

100% guaranteed by the SBA.

As of December 31, 2021, substantially all of these PPP loans were forgiven by the SBA with $6,299,000 remaining outstanding.

Throughout 2020 and 2021, Congress enacted several pieces of legislation aimed at providing economic aid and stimulus to individuals and businesses in response to the Covid-19 pandemic’s severe economic interruptions.

Among others, these significant actions included direct federal stimulus payments, a moratorium on evictions and foreclosures, deferral of federal student loan payments, increases in tax benefits, state and local government funding, and an expansion of bankruptcy relief for small businesses and individuals.

The stimulus actions of the federal government and policies implemented by the Federal Reserve have contributed to an increase in inflation during most of 2021.

As a result, in December 2021, the Federal Reserve released projections related to the target range for the Federal Funds rate that imply varied increases in the rate over the next few years.

There can be no assurance that any increases in the Federal Funds rate will occur, and the Company continues to monitor these developments.

While vaccination efforts are ongoing and a significant amount of previous business and other restrictions have been lifted, the ongoing impact of COVID-19, including any increases in infection rates, new variants, supply chain disruptions, labor force shortages, renewed restrictions to combat its spread, and the enactment of new laws and regulations that affect banks and bank holding companies, cannot be estimated.

Given these and other uncertainties discussed throughout this report, the Company remains subject to heightened risk, and the aggregate impact that COVID-19 could have on the Company’s financial condition and operating results is presently unknown.

The Company remains committed to creating a safe and healthy environment for employees while offering assurance that it remains a financially strong service provider possessing the resources necessary to weather this pandemic in support of its valued customers.

For further discussion on COVID-19 and its impact on the Company, refer to Item 8, “Financial Statements and Supplementary Data—Note 1.

Summary of Results

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2022 2021 2020 2022 v.

Fee revenue and other income $ 109,691 $ 100,441 $ 110,069 9.2 % (8.7) %

Net interest income after provision 44,456 44,515 47,166 (0.1) (5.6)

Processing fees $ 76,470 $ 74,589 $ 74,638 2.5 % (0.1) %

Financial fees 43,757 32,733 23,107 33.7 41.7

Net interest income 58,844 44,326 45,325 32.8 (2.2)

Provision for (release of) credit losses 1,350 (130) 810 (1138.5) (116.0)

Other 4,755 2,369 2,696 100.7 (12.1)

Total revenues 182,476 154,147 144,956 18.4 6.3

Operating expense 139,576 120,326 114,615 16.0 5.0

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Diluted earnings per share $ 2.53 $ 2.00 $ 1.73 26.5 15.6

Average earning assets $ 1,999,609 $ 1,674,297 $ 1,472,399 19.4 13.7

Return on average assets 1.35 % 1.23 % 1.29 % — —

Return on average equity 16.53 % 11.29 % 10.23 % — —

Net interest margin (1)

2.31 % 2.82 % 3.36 % — —

Total processing volume 64,039 60,476 63,567 5.9 (4.9)

Total invoice dollars processed and paid $ 52,697,397 $ 39,975,033 $ 42,973,242 31.8 (7.0)

(1) Presented on a tax-equivalent basis.

The results of 2021 compared to 2020 include the following significant items:

Overall, the Company’s revenue and profitability improved, primarily as a result of the increases in total processing volume and total invoice dollars processed and paid as compared to the prior year.

Processing volume and invoice dollars processed increased 6% and 32%, respectively.

The significant increase in dollars processed was due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply,

among other factors.

In addition, far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020 also contributed to the increase.

The higher dollar volumes helped produce the 10% increase in payment and processing fees via financial fees earned on payment volumes.

The increase in dollar volumes also assisted in driving an increase in average earning assets of 19%.

However, net interest income after provision for credit losses was flat year over year.

The Federal Reserve’s actions to lower the Federal Funds rate in the first quarter of 2020, adversely impacted the net interest rate margin which declined to 2.31% as compared to 2.82%in the prior year.

The increase in average earning assets partially offset the impact of the near-zero interest rate environment on the Company’s net interest margin.

There was also a release of credit losses recorded of $130,000 in 2021 compared to a provision for credit losses of $810,000 in 2020.

The positive variance in the provision for credit losses was primarily due to improved economic conditions in 2021, partially offset by the impact of loan growth on the Company's ACL calculation.

Operating expenses increased 5%, as the increase in the number of transactions processed had a corresponding impact on personnel expense.

In addition, the Company continued the strategic investment in various technology initiatives in an effort to improve customer experience and drive efficiencies with respect to invoice payment and processing.

The Company's return on average equity and diluted earnings per share improved as compared to the prior year driven by higher earnings and share buybacks which reduced outstanding diluted shares and shareholders' equity.

The Company recorded revenue of $182.5 million in 2022, up 18.4% from the prior year, primarily due to an increase in transportation and facility dollar volumes processed and rising interest rates.

Net income was $34.9 million, and diluted EPS was $2.53 per share, increases of 22.0% and 26.5% from the prior year, respectively.

The Company posted a 1.35% return on average assets and 16.53% return on average equity.

Further detail about the components of revenue and expenses are explained in the sections following.

Fee Revenue and Other Income

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Transportation invoice dollar volume $ 44,749,359 $ 36,829,841 $ 26,516,803 21.5 38.9

Expense management transaction volume (1)

Facility transaction volume (1)

12,990 12,499 12,572 3.9 (0.6)

Expense management dollar volume (1)

Facility dollar volume (1)

$ 19,514,049 $ 15,867,556 $ 13,458,231 23.0 17.9

Payment and processing revenue $ 106,455 $ 97,204 $ 107,953 9.5 (10.0)

Bank service fees $ 2,239 $ 1,704 $ 1,386 31.4 22.9

Gains on sales of investment securities $ 51 $ 1,075 $ 19 (95.3) 5,557.9

Other $ 946 $ 458 $ 711 106.6 (35.6)

Processing fees $ 76,470 $ 74,589 $ 74,638 2.5 (0.1)

Financial fees $ 43,757 $ 32,733 $ 23,107 33.7 41.7

Other fees $ 4,755 $ 2,369 $ 2,696 100.7 (12.1)

(1) Includes energy, telecom and environmental

The increase in invoice transaction volume in transportation was driven by an increase in economic activity as compared to 2020 in addition to new customer acquisition.

Transaction volumes in expense management were flat year over year as new customer acquisition almost fully offset the loss of one large customer in the prior year.

The 39% increase in dollars processed in transportation was due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply, among other factors.

The 18% increase in dollar volumes in expense management was driven by far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020.

The higher dollar volumes helped produce the 10% increase in payment and processing fees via financial fees earned on payment volumes.

In addition, the increase in transportation invoice transaction volume also positively contributed to the increase in payment and processing fees in 2021.

Bank service fees increased 31% year over year due to organic growth, specifically growth in the Company's integrated payments business.

There were gains from the sale of securities in 2021 and 2020 of $51,000 and $1,075,000, respectively.

Other income increased primarily due to the purchase of additional bank-owned life insurance in September 2021 and an increase in death benefits received over the prior year.

Financial fees increased $11.0 million, or 33.7%, in 2022 as a result of the increases in total invoice dollars processed and paid and a higher interest rate environment as compared to the prior year.

Transportation and facility invoice dollars processed and paid increased 21.5% and 23.0%, respectively.

The significant increase in dollars processed and paid was due to inflationary pressures and higher energy prices, among other factors.

Processing fees increased $1.9 million, or 2.5%, during 2022 largely driven by a 3.9% increase in facility transaction volumes as well as an increase in fees received for ancillary processing services.

Other revenue increased $2.4 million as compared to the prior year primarily due to the TouchPoint acquisition in June 2022 and increased bank service fees due to customer growth.

Net Interest Income

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(1) Presented on a tax-equivalent basis using a tax rate of 21%.

The decrease in net interest income in 2021 compared to 2020 is primarily due to the Federal Reserve’s actions to lower the Federal Funds rate in the first quarter of 2020, adversely impacting the net interest rate margin which declined to 2.31% as compared to 2.82% in the prior year.

An increase in average earning assets partially offset the impact of the near-zero interest rate environment on the Company’s net interest margin.

The yield on interest-earning assets declined 59 basis points from 2.96% in 2020 to 2.37% in 2021 while the cost of interest-bearing liabilities declined 29 basis points from 0.49 % in 2020 to 0.20% in 2021.

Average loans decreased $18,699,000, or 2%, to $887,662,000.

This decrease was primarily the result of the decline in the average balance of PPP loans of $49,758,000 due to the forgiveness of these loans throughout the year.

Excluding PPP loans, average loans increased $31,060,000.

The average yield on loans declined 20 basis points to 3.96% in 2021 due to the continued repricing of loans in the current low interest rate environment in addition to lower fees earned on PPP loans.

Average investment securities increased $132,303,000, or 36%.

The Company purchased investment securities throughout 2021 in an effort to deploy short-term investments into investment securities to enhance the yield on interest-earning assets.

The increase in net interest income in 2022 compared to 2021 is primarily due to the Federal Reserve’s actions to increase the Federal Funds rate throughout the year of 2022, positively affecting the net interest rate margin which increased to 2.74% as compared to 2.31% in the prior year.

Additionally, a 10.3% increase in average earning assets contributed to the increase in net interest income.

The yield on interest-earning assets increased 53 basis points from 2.37% in 2021 to 2.90% in 2022 while the cost of interest-bearing liabilities increased 38 basis points from 0.20% in 2021 to 0.58% in 2022.

Average loans increased $104.3 million, or 11.8%, to $992.0 million.

This increase was due to solid loan growth during 2022, specifically in the Company's franchise restaurants, faith-based and lease financing receivables portfolios.

increases were offset by a $64.9 million decrease in average PPP loans as compared to 2021.

The average yield on loans increased 2 basis points to 3.98% in 2022 as the increase in market interest rates was offset by a decline of $2.4 million in PPP loan fees.

Average investment securities increased $291.2 million, or 58.5%.

The Company purchased investment securities throughout 2021 and 2022 in an effort to deploy short-term investments into investment securities to enhance the yield on interest-earning assets.

The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position.

The average yield on investment securities declined 62 basis points to 2.30% in 2021 due to the purchase of investment securities in 2021 in a historically low rate environment.

Average short-term investments, consisting of interest bearing deposits in other financial institutions and federal funds sold, increased $211,963,000, or 53%.

The increase is a result of the increase in the average balance of deposits and accounts and drafts payable, partially offset by the purchase of investment securities.

The average yield on short-term investments declined 18 basis points to 0.12% in 2021.

The average tax-equivalent yield on investment securities in 2022 was consistent with 2021 at 2.30%.

Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, decreased $189.3 million, or 30.8%.

The decrease is primarily a result of the increase in the average balances of investment securities, loans, payments in advance of funding and bank owned life insurance, partially offset by the increase in the average balances of deposits and accounts and drafts payable.

The average yield on short-term investments increased 139 basis points to 1.51% in 2022 due to the increase in short-term market interest rates.

The vast majority of these short-term investments are held at the Federal Reserve Bank.

Average interest-bearing deposits increased $111,651,000, or 23%, and average non-interest-bearing demand deposits increased $91,447,000, or 26%.

These increases were largely due to the impact of government stimulus programs and resulting cash deposits, along with an increase in the Company's integrated payments activity.

The cost of interest-bearing deposits decreased 29 basis points to 0.20% in 2021 as a result of the repricing of customer deposits in the historically low interest rate environment.

Average interest-bearing deposits increased $11.2 million, or 1.9%, and average non-interest-bearing demand deposits increased $140.2 million, or 31.3%.

These increases were largely due to organic growth within our customer base.

The cost of interest-bearing deposits increased 38 basis points to 0.58% in 2022 as a result of the rising rate environment.

Distribution of Assets, Liabilities and Shareholders' Equity;

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Interest-earning assets

Loans (2), (3) :

$ 992,004 $ 39,460 3.98 % $ 887,662 $ 35,178 3.96 % $ 906,361 $ 37,665 4.16 %

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Goodwill and other intangibles 19,558 17,273 18,132

Unrealized (loss) gain on investment securities (43,147) 15,833 18,368

Other assets 51,686 35,231 37,218

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Shareholders’ equity 211,142 253,436 246,088

Total liabilities and share-holders’ equity $ 2,333,992 $ 1,952,110 $ 1,749,574

Total liabilities and shareholders’ equity $ 2,586,078 $ 2,333,992 $ 1,952,110

Net interest income (3)

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(1) Balances shown are daily averages.

(2) For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding.

Interest on nonaccrual loans is recorded when received as discussed further in Item 8, Note 1 of this report.

(3) Interest income on loans includes net loan fees of $3,412,000, $3,608,000, and $650,000 for 2021, 2020 and 2019, respectively.

Loan fees include $2,634,000 and $3,057,000 of PPP loan fees for 2021 and 2020, respectively.

(2) Interest income on loans includes net loan fees of $684,000, $3.4 million, and $3.6 million for 2022, 2021 and 2020, respectively.

Loan fees include $167,000, $2.6 million, and $3.1 million of PPP loan fees for 2022, 2021 and 2020, respectively.

(3) Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%.

The tax-equivalent adjustment was approximately $1,873,000, $1,889,000, and $2,085,000 for 2021, 2020 and 2019, respectively.

The tax-equivalent adjustment was approximately $1.7 million for 2022 and $1.9 million for each of 2021 and 2020.

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

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Increase (decrease) in interest income:

Loans (2), (3) :

$ 4,150 $ 132 $ 4,282 $ (766) $ (1,721) $ (2,487)

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(1) The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the change in each.

(2) Average balances include nonaccrual loans.

(2) Interest income includes net loan fees.

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Interest earned on the loan portfolio is a primary source of income for the Company.

The loan portfolio was $960,567,000 representing 38% of the Company's total assets as of December 31, 2021 and generated $35,178,000 in interest income during the year then ended.

The loan portfolio was $1.08 billion, representing 42.1% of the Company's total assets as of December 31, 2022 and generated $39.5 million in interest income during the year then ended.

The following tables show the composition of the loan portfolio at the end of the periods indicated and remaining maturities for loans as of December 31, 2022.

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The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan portfolio composition table and as are discussed in Item 8, Note 4, of this report.

As can be seen in the loan composition table above and as discussed in Item 8, Note 4, the Company's primary market niche for banking services is privately held businesses, franchise restaurants, and faith-based ministries.

The Company's primary market niche for banking services is privately held businesses, franchise restaurants, and faith-based ministries.

Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable, inventory, machinery and equipment, and the real estate from which the borrower operates.

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When problems are identified, appraised values are updated on a continual basis, either internally or through an updated external appraisal.

Loans increased $68,891,000, or 8%, during 2021 to $960,567,000 as of December 31, 2021.

Franchise restaurant loans, which are included in commercial and industrial loans, increased $100,593,000 or 114%, during 2021 to $189,074,000 as of December 31, 2021.

The increase in franchise loans was due to organic growth in an effort to expand this loan type.

The Company also experienced organic loan growth in other loan types.

These increases were partially offset by the decrease in PPP loans of $103,405,000 from $109,704,000 at December 31, 2020 to $6,299,000 at December 31, 2021.

The decrease in PPP loans was due to ongoing forgiveness of these loans by the SBA in 2021.

Loans increased $122.3 million, or 12.7%, to $1.08 billion at December 31, 2022.

Lease finance receivables and franchise restaurant loans, which are both included in commercial and industrial loans, increased $80.4 million, or 100.1%, and $34.3 million, or 18.1%, respectively, during 2022.

These increases were due to organic growth in an effort to expand these loan types.

Faith-based mortgages increased $31.7 million, or 8.9%, during 2022.

These increases were partially offset by the decrease in PPP loans of $6.3 million at December 31, 2021 to $0 at December 31, 2022.

Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.

Provision and Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments

The Company recorded a release of credit losses and off-balance sheet credit exposures of $130,000 in 2021 and a provision for credit losses of $810,000 in 2020.

The amount of the (release of) provision for credit losses was derived from the Company’s quarterly CECL model.

The amount of the provision will fluctuate as determined by these quarterly analyses.

The Company recorded a provision for credit losses and off-balance sheet credit exposures of $1.4 million in 2022 and a release of credit losses of $130,000 in 2021.

The amount of the provision for (release of) credit losses was derived from the Company’s CECL model.

The amount of the provision will fluctuate as determined by these analyses.

The Company had net loan recoveries of $13,000 and $27,000 in 2022 and 2021, respectively.

The ACL was $12,041,000 at December 31, 2021 compared to $11,944,000 at December 31, 2020.

The ACL represented 1.25% of outstanding loans at December 31, 2021 as compared to 1.34% of outstanding loans at December 31, 2020.

The ACL was $13.5 million at December 31, 2022 compared to $12.0 million at December 31, 2021.

The ACL represented 1.25% of outstanding loans at both December 31, 2022 and December 31, 2021.

The allowance for unfunded commitments was $232,000 at December 31, 2022 and $367,000 at December 31, 2021.

There were no nonperforming loans outstanding at December 31, 2021 and December 31, 2020.

There was one nonperforming loan outstanding with an outstanding balance of $1.2 million, or 0.11% of total loans, at December 31, 2022 and no nonperforming loans outstanding at December 31, 2021.

The single nonperforming loan at December 31, 2022 paid off in full during January 2023.

The ACL has been established and is maintained to estimate the lifetime credit losses expected in the loan portfolio.

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evaluated, the Company uses two impairment measurement methods:

1) the present value of expected future cash flows and 2) collateral value.

1) the present value of expected future cash flows and 2) collateral values.

Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL.

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December 31 1,082,906 960,567 891,676 772,638 721,587

Ratio of allowance for credit losses to loans outstanding:

Average 1.36 % 1.32 % 1.39 % 1.44 % 1.54 %

December 31 1.25 % 1.34 % 1.37 % 1.42 % 1.49 %

Ratio of allowance for credit losses to loans outstanding at December 31 1.25 % 1.25 % 1.34 % 1.37 % 1.42 %

Ratio of net recoveries to average loans outstanding — — — (0.01) % —

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There was no interest income recognized on nonaccrual loans for the years ended 2022 and 2021.

There were no nonaccrual loans or foreclosed assets at December 31, 2021 or December 31, 2020.

There was one nonaccrual loan of $1.2 million at December 31, 2022 and no nonaccrual loans at December 31, 2021.

There were no foreclosed assets at December 31, 2022 or December 31, 2021.

The single nonperforming loan at December 31, 2022 paid off in full during January 2023.

The Company does not have any foreign loans.

The Company's loan portfolio does not include a significant amount of single family real estate mortgages, as the Company does not market its services to retail customers.

The Company's loan portfolio includes $212,000 of single family real estate mortgages, as the Company does not market its services to retail customers.

Also, the Company had no sub-prime mortgage loans or residential development loans in its portfolio in any of the years presented.

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Total operating expense $ 139,576 $ 120,326 $ 114,615

Personnel expense increased $4,093,000, or 5%, to $92,155,000 as a result of:

a) an increase in 401(k) match expense of $1,980,000 due to the increase in Company 401(k) match as a result of the freezing of the defined benefit pension plan in February 2021;

b) an increase in base salaries and other benefits (i.e.

payroll taxes) due to the increase in transaction volume in 2021 as compared to 2020 along with general salary increases;

and c) an increase in profit sharing of $773,000 associated with the corresponding increase in net income.

These increases were partially offset by a reduction in cost associated with the Company's defined benefit pension plan of $5,918,000 due to the freezing of the plan in February 2021.

Other operating expense increased $1,356,000, or 9%, to $16,743,000 as a result of:

a) an increase in business development expense;

b) an increase in data processing and other outside service charges related to increased payment volumes;

and c) an increase in employee procurement expense.

These increases were partially offset by a decrease in professional fees as a result of the hiring of a General Counsel in late 2020 and an associated decrease in outside legal fees.

Total operating expenses increased 16.0% in 2022 compared to 2021, primarily as a result of higher personnel and other operating expenses.

Personnel expense increased $14.3 million, or 15.5%, to $106.5 million as a result of merit increases, wage pressures, an increase in average full-time equivalent employees of 10.0% due to the TouchPoint acquisition and strategic investment in optical character recognition, artificial intelligence, machine learning and other processes to consume images and produce data.

Also driving the increase in personnel expense was an increase in stock compensation and profit sharing due to improved Company earnings and the impact on performance based restricted stock.

Stock compensation increased $3.9 million and profit sharing increased $1.4 million as compared to the prior year.

Other operating expense increased $5.3 million, or 31.9%, to $22.1 million as a result of higher levels of travel, business development, employee procurement, data processing, insurance, and other professional fees.

Partially causing the increase in data processing, other professional fees, and other operating expenses are 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.

Income Tax Expense

Income tax expense in 2021 totaled $5,217,000, compared to $5,165,000 in 2020.

Income tax expense in 2022 totaled $8.0 million, compared to $5.2 million in 2021.

When measured as a percent of pre-tax income, the Company’s effective tax rate was 18.6% and 15.4% in 2022 and 2021, respectively.

The decrease in the effective tax rate in 2021 compared to 2020 was primarily due to changes in the levels of tax credits, tax-free interest income on municipal securities, income on bank-owned life insurance and other miscellaneous book to tax true-ups upon filing of the Company's tax returns for the years ended December 31, 2020 and 2019.

The increase in the effective tax rate in 2022 compared to 2021 was primarily due to changes in the levels of tax credits, tax-free interest

income on municipal securities, and other miscellaneous book to tax true-ups upon filing of the Company's tax returns for the years ended December 31, 2021 and 2020.

Investment Portfolio

Investment securities increased $315,727,000, or 88%, during 2021 to $673,453,000 at December 31, 2021.

State and political subdivision securities increased $65,154,000, or 21%, to $371,128,000.

Mortgage-backed securities increased $116,894,000, or 226%, to $168,646,000.

The Company also purchased corporate bonds and asset-backed securities throughout 2021 in an effort to invest liquidity and increase the yield on interest-earning assets.

Investment securities increased $81.0 million, or 12.0%, during 2022 to $754.5 million at December 31, 2022.

Treasury securities increased to $155.3 million during 2022 compared to none held in 2021.

State and political securities decreased $76.0 million, or 20.5%, to $295.1 million as a result of runoff in the portfolio and a decrease in fair value due to the change in market interest rates.

The investment portfolio provides the Company with a significant source of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates.

Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s sources of funds and the economic outlook.

During 2021, the Company's purchase of investment securities totaled $494,226,000.

During 2022, the Company's purchase of investment securities totaled $232.1 million.

There was no single issuer of securities in the investment portfolio at December 31, 2022 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.

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Government agencies or sponsored enterprises 45,023 49,341 —

Certificates of deposit — — 500

Treasury securities 155,283 — —

Total investments $ 754,468 $ 673,453 $ 357,726

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Government agencies or sponsored enterprises — — — 45,023 4.32 %

Treasury securities 48,980 106,303 — — 2.67 %

Total investments $ 65,221 $ 261,763 $ 205,278 $ 222,206 2.57 %

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3.30 % 3.34 % 2.23 % 2.24 % 2.57 %

(1) Yields are presented on a tax-equivalent basis assuming a tax rate of 21% for 2021, 2020 and 2019.

(1) Yields are presented on a tax-equivalent basis assuming a tax rate of 21%.

Deposits and Accounts and Drafts Payable

Noninterest-bearing demand deposits increased 18% to $582,642,000 at December 31, 2021.

Interest-bearing deposits increased $81,509,000, or 15%, to $638,861,000 at December 31, 2021.

These balances increased considerably in 2021 as governmental stimulus programs and an increase in integrated payments activity boosted deposit balances.

Accounts and drafts payable generated by the Company in its payment processing operations increased $215,010,000, or 26%, to $1,050,396,000 at December 31, 2021.

This increase was primarily the result of a significant increase in dollar volumes processed in transportation due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply, among other factors.

An increase in dollar volumes in expense management

driven by far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020 also contributed to the increase.

Noninterest-bearing demand deposits increased 10.3% to $642.8 million at December 31, 2022 primarily as a result of an increase in balances related to CassPay customers.

These balances can fluctuate significantly on a day to day basis.

Interest-bearing deposits decreased $24.4 million, or 3.8%, to $614.5 million at December 31, 2022.

Accounts and drafts payable generated by the Company in its payment processing operations increased $17.2 million, or 1.6%, to $1.07 billion, at December 31, 2022.

Due to the Company’s payment processing cycle, average balances are much more indicative of the underlying activity than period-end balances since point-in-time comparisons can be misleading if the comparison dates fall on different days of the week.

Average accounts and drafts payable increased $182,967,000, or 23% to $986,572,000 during 2021.

Average accounts and drafts payable increased $154.8 million, or 15.7%, to $1.14 billion during 2022.

The higher average accounts and drafts payable was due to a significant increase in dollars processed from inflationary pressures and higher energy prices, among other factors.

The composition of average deposits and the average rates paid on those deposits is represented in the table entitled “Distribution of Assets, Liabilities and Shareholders' Equity;

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Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity.

The balances of liquid assets consist 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, totaled $514,928,000 at December 31, 2021, a decrease of $155,600,000, or 23%, from December 31, 2020.

The decrease during 2021 is primarily attributed to the funds being used for purchases of available-for-sale investment securities.

The balances of liquid assets consist 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, totaled $200.9 million at December 31, 2022, a decrease of $314.0 million, or 61.0%, from December 31, 2021.

The decrease during 2022 is primarily attributed to available cash being used for purchases of available-for-sale investment securities and to fund loan growth.

At December 31, 2022, cash and cash equivalents represented 7.8% of total assets and are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines.

Total investment securities available-for-sale at fair value were $673,453,000 at December 31, 2021, an increase of $315,727,000, or 88%, from December 31, 2020.

Total investment securities available-for-sale at fair value were $754.5 million at December 31, 2022, an increase of $81.0 million, or 12.0%, from December 31, 2021.

Investment securities represented 29.3% of total assets at December 31, 2022.

Of the total portfolio, 8.8% mature in one year or less, 34.6% mature after one year through five years and 56.6% mature after five years.

As of December 31, 2021, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83,000,000 in aggregate.

As of December 31, 2021, the Bank had secured lines of credit with the Federal Home Loan Bank of $228,849,000 collateralized by commercial mortgage loans.

At December 31, 2021, the Company had lines of credit from two banks up to a maximum of $150,000,000 in aggregate collateralized by state and political subdivision securities.

As of December 31, 2022, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83.0 million in aggregate.

As of December 31, 2022, the Bank had secured lines of credit with the Federal Home Loan Bank of $237.8 million collateralized by commercial mortgage loans.

At December 31, 2022, the Company had lines of credit from three banks up to a maximum of $200.0 million in aggregate collateralized by state and political subdivision securities.

There were no amounts outstanding at December 31, 2022, and 2021 under any of the lines of credit.

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The accounts and drafts payable generated by the Company have also historically been a stable source of funds.

Net cash flows provided by operating activities for the years 2021, 2020 and 2019 were $34,547,000, $47,781,000, and $42,126,000, respectively.

Net income plus depreciation and amortization accounts for most of the operating cash provided.

Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable

Net cash flows provided by operating activities for the years 2022, 2021 and 2020 were $51.6 million, $34.5 million, and $47.8 million, respectively.

Net income plus depreciation and amortization accounts for most of the operating cash

Further analysis of the changes in these account balances is discussed earlier in this report.

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Capital expenditures in 2023 are expected to consist of equipment and software related to the payment and information processing services business.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $45.9 million and $41.1 million for the years ended December 31, 2022 and 2021, respectively, an increase of $4.8 million year over year.

The increase was due to the increase in net income of $6.3 million, partially offset by a decrease in net amortization of premium/discount on investment securities of $1.1 million.

The net amortization of premium/discount on investment securities is dependent on the type of securities purchased and changes in the prevailing market interest rate environment.

Other factors impacting the $17.1 million increase in net cash provided by operating activities include:

• An increase in other operating activities, net of $9.4 million, primarily due to changes in various accounts receivable and payable;

• An increase in stock-based compensation expense of $3.9 million due to improved Company earnings and the impact on performance based stock;

• A change in the provision for (release of) credit losses of $1.5 million due to loan growth in 2022.

On an overall basis, the Company's $17.1 million increase in net cash provided by operating activities was due to improved revenue and profitability largely due to higher financial fee revenue and net interest income.

The improved revenue and profitability for 2022 is in large part due to a 33.7% increase in financial fees and 32.8% increase in net interest income.

Financial fees increased as a result of an increase in total invoice dollars processed and paid and a higher interest rate environment as compared to the prior year.

Transportation and facility invoice dollars processed and paid increased 21.5% and 23.0%, respectively.

The significant increase in dollars processed and paid was due to inflationary pressures and higher energy prices, among other factors.

Additionally, a 10.3% increase in average earning assets contributed to the increase in net interest income.

The Company generated net cash provided by operating activities of $34.5 million and $47.8 million for the years ended December 31, 2021 and 2020, respectively, a decrease of $13.2 million.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $41.1 million and $36.4 million for the years ended December 31, 2021 and 2020, respectively, an increase of $4.7 million.

The increase was largely due to the increase in net income of $3.4 million in addition to an increase in net amortization of premium/discount on investment securities of $1.4 million primarily resulting from the purchase of $494.2 million of securities available-for-sale in 2021, typically at a premium given the prevailing low interest rate environment.

Other factors impacting the $13.2 million decrease in net cash provided by operating activities include:

• An increase in the change in the pension liability of $6.2 million primarily due to the investment performance of the pension assets and changes in other actuarial assumptions, including the discount rate;

• A change in other operating activities, net, of $10.1 million primarily due to a $5.0 million change associated with payroll taxes deferred under the CARES Act in 2020 that were paid in 2021, and the receipt of PPP fees from the SBA in 2020 that were recognized into interest income in 2021 resulting in a $3.6 million change;

partially offset by:

◦ An increase in stock-based compensation expense of $592,000 due to an increase in the fair value of restricted stock grants to personnel and improved company performance;

◦ A change in the (release of) provision for credit losses of $940,000 due to improved credit quality.

On an overall basis, despite the $13.2 million decrease in net cash provided by operating activities, the Company generated a higher level of cash from operating activities in 2021 due to improved revenue and profitability, partially offset by an increase in the negative impact of noncash items.

The improved revenue and profitability for 2021 is in large part due to a 38.9% increase in dollars processed in transportation due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply experienced throughout the market generally in 2021, among other factors.

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.

Those that could significantly impact the Company include the general levels of interest rates, business activity, inflation, and energy costs as well as new business opportunities available to the Company.

As a financial institution, a significant source of the Company’s earnings is generated from net interest income.

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The Company and its banking subsidiary continue to exceed all regulatory capital requirements, as evidenced by the capital ratios at December 31, 2022 as shown in Item 8, Note 2 of this report.

In 2021, cash dividends paid were $15,446,000, a decrease of $153,000, or 1%, compared to $15,599,000 in 2020.

The decrease is attributable to the amount of shares repurchased, partially offset by the increase to the per-share amount paid during the fourth quarter of 2021.

Shareholders’ equity was $245,798,000, or 10% of total assets, at December 31, 2021, a decrease of $15,362,000 as compared to December 31, 2020.

The decrease was primarily a result of the repurchase of treasury shares of $30,997,000 and the payment of cash dividends of $15,446,000, partially offset by net income of $28,604,000.

Cash dividends paid were $15.4 million in each of 2022 and 2021.

Shareholders’ equity was $206.3 million, or 8.0% of total assets, at December 31, 2022, a decrease of $39.5 million as compared to December 31, 2021.

The decrease was primarily a result of an increase in accumulated other comprehensive loss of $59.8 million due to the change in market values on investment securities as a result of the rising interest rate environment, the payment of cash dividends of $15.4 million, and the repurchase of treasury shares of $5.3 million, partially offset by net income of $34.9 million.

Dividends from the Bank are a source of funds for payment of dividends by the Company to its shareholders.

The only restrictions on dividends are those dictated by regulatory capital requirements, state corporate laws and prudent and sound banking principles.

During 2021, the Bank paid a dividend of $15,000,000 to the Company.

As of December 31, 2021, unappropriated retained earnings of $34,976,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

During 2022, the Bank paid dividends of $15.0 million to the Company.

As of December 31, 2022,

unappropriated retained earnings of $29.2 million were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

The Company maintains a treasury stock buyback program approved by the Board of Directors in October 2021 pursuant to which the Board of Directors has authorized the repurchase of up to 750,000 shares of the Company’s common stock and has no expiration date.

During the three months ended December 31, 2021, the Company repurchased a total of 278,919 shares of its common stock pursuant to its treasury stock buyback program.

As such, 471,081 shares remain under the buyback program at December 31, 2021.

The Company repurchased a total of 713,857 shares at an aggregate cost of $30,997,000 during the year ended December 31, 2021 and 162,901 shares at an aggregate cost of $6,825,000 during the year ended December 31, 2020.

A total of 340,707 shares remain under the buyback program at December 31, 2022.

The Company repurchased a total of 130,374 shares at an aggregate cost of $5.3 million during the year ended December 31, 2022 and 713,857 shares at an aggregate cost of $31.0 million during the year ended December 31, 2021.

A portion of the repurchased shares may be used for the Company’s employee benefit plans, and the balance will be available for other general corporate purposes.

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Inflationary pressures may also have an impact on total assets, earnings and capital, which could impact the Company's ability to grow.

During 2021, supply chain disruption and inflation, among other factors, had the impact of increasing the average balance of accounts and drafts payable and total assets.

During 2021 and 2022, supply chain disruption, rising energy prices and inflation, among other factors, had the impact of increasing the average balance of accounts and drafts payable and total assets.

An increase in total assets could have the impact of decreasing our regulatory capital ratios if earnings and total regulatory capital do not increase at the same rate.

As a result of rising inflation, in December 2021, the Federal Reserve released projections related to the target range for the Federal Funds rate that imply varied increases in the rate over the next few years.

There can be no assurance that any increases in the Federal Funds rate will occur, and the Company continues to monitor these developments.

As a result of rising inflation, the Federal Reserve has increased the Federal Funds rate over the course of 2022 and into the first quarter of 2023.

The increase in the Federal Funds rate has contributed to the increase in the Company's net interest margin to 2.74% in 2022 from 2.31% in 2021, therefore positively impacting net interest income.

There can be no assurance that further increases in the Federal Funds rate will occur, and the Company continues to monitor such impact to its future levels of net interest income.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

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These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

At December 31, 2021, the balance of loan commitments, standby and commercial letters of credit were $208,395,000, $12,859,000 and $771,000, respectively.

At December 31, 2022, the balance of loan commitments, standby and commercial letters of credit were $237.0 million, $14.5 million and $354,000, respectively.

Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.

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See Note 14 "Disclosures about Fair Value of Financial Instruments" for more information.

During 2021, the Company made a contribution of $330,000 to its noncontributory defined benefit pension plan.

During 2022, the Company did not make a contribution to its noncontributory defined benefit pension plan.

In determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets.

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Weighted average discount rate 2.85 %

Rate of increase in compensation levels (a)

Expected long-term rate of return on assets 6.00 %

(a) 6.00% graded down to 3.25% over the first seven years of service.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis