What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 111 added, 109 removed, 437 unchanged (33% of the section changed)

9 unchanged sentences

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, transactional level payment services, and investment of account balances

generated during the payment process.

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, 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.

12 unchanged sentences

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

The Company 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 recorded revenue of $197.5 million in 2023, up 8.2% from the prior year.

Net income was $30.1 million and diluted EPS was $2.18 per share, decreases of 13.9% and 13.8% from the prior year, respectively.

The Company continues to operate profitably, posting a 1.24% return on average assets and 14.24% return on average equity.

The Company’s common equity Tier 1 capital ratio was 14.73% at December 31, 2023, 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.

In addition, the Company has maintained exceptional credit quality with no non-performing loans at December 31, 2023, and no loan charge-offs during the year ended December 31, 2023.

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.

9 unchanged sentences

A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to the Company's Consolidated Financial Statements are included in Item 8, "Financial Statements and Supplementary Data—Note 1.”

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

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

Allowance for Credit Losses .

17 unchanged sentences

Net interest income 66,494 58,844 44,326 13.0 % 32.8 %

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

(Release of) provision for credit losses (550) 1,350 (130) (140.7) % (1138.5) %

Other 4,916 4,755 2,369 3.4 % 100.7 %

7 unchanged sentences

Return on average equity 14.24 % 16.53 % 11.29 % — —

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 recorded revenue of $197.5 million in 2023, up 8.2% from the prior year, due to increases in processing fees, financial fees, net interest income and a positive variance in the (release of) provision for credit losses.

Operating expenses increased 14.7% as a result of increases in personnel and other expenses as the Company invests in, and transitions to, improved technology.

Net income was $30.1 million and diluted EPS was $2.18 per share, decreases of 13.9% and 13.8% from the prior year, respectively.

The Company posted a 1.24% return on average assets and 14.24% return on average equity.

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As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis, discounts received for services provided to carriers and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income.

Processing volumes, fee revenue and other income were as follows:

Processing volumes, average payments in advance of funding, fee revenue and other income were as follows:

(In thousands) December 31, % Change

6 unchanged sentences

$ 19,836,821 $ 19,514,049 $ 15,867,556 1.7 % 23.0 %

Average payments in advance of funding $ 234,865 $ 278,185 $ 211,809 (15.6) % 31.3 %

Processing fees $ 79,566 $ 76,470 $ 74,589 4.0 % 2.5 %

Financial fees $ 45,985 $ 43,757 $ 32,733 5.1 % 33.7 %

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

(1) Includes energy, telecom and environmental

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.

Other income $ 4,916 $ 4,755 $ 2,369 3.4 % 100.7 %

(1) Includes utility, telecom and waste

Processing fees increased $3.1 million, or 4.0%, during 2023 largely driven by a 6.7% 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.

Transportation invoice volumes decreased 2.3% over the same period.

The decline in transportation volumes is primarily due to the on-going freight recession.

Financial fees increased $2.2 million, or 5.1%, in 2023 primarily attributable to the increase in short-term interest rates throughout 2023, partially offset by a decline in transportation dollar volumes of 14.4%.

The decline in transportation dollar volumes had a direct effect on the 15.6% decrease in average payments in advance of funding, which is the primary generator of financial fees.

Net Interest Income

5 unchanged sentences

Average earning assets $ 2,076,951 $ 2,205,792 $ 1,999,609 (5.8) % 10.3 %

Average interest-bearing liabilities $ 573,308 $ 603,262 $ 592,069 (5.0) % 1.9 %

Net interest income (1)

6 unchanged sentences

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

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 increase in net interest income in 2023 compared to 2022 is primarily due to an increase in the Federal Funds rate throughout 2022 and into 2023, positively affecting the net interest rate margin which increased to 3.25% as compared to 2.74% in the prior year.

This was partially offset by a decrease in average earning assets of $128.8 million, or 5.8%.

The yield on interest-earning assets increased 114 basis points from 2.90% in 2022 to 4.04% in 2023 while the cost of interest-bearing liabilities increased 226 basis points from 0.58% in 2022 to 2.84% in 2023.

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.

Average loans increased $63.7 million, or 6.4%, to $1.06 billion.

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

The average yield on loans increased 83 basis points to 4.81% in 2023.

Average investment securities decreased $54.7 million, or 6.9%, due to the sale and maturity of investment securities throughout 2023.

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

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

The average tax-equivalent yield on investment securities increased 33 basis point to 2.63% in 2023 as a result of the increase in short and long-term interest rates.

The average yield on tax-exempt investment securities declined 19 basis points to 2.69% driven by maturities of higher rate securities.

These securities have longer term fixed rates and the Company has not purchased any such securities since interest rates began increasing.

Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, decreased $137.8 million, or 32.4%.

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 $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.

The decrease is primarily a result of the increase in the average balance of loans, coupled with the decrease in average funding sources, partially offset by the decrease in average investment securities.

The average yield on short-term investments increased 327 basis points to 4.78% in 2023 primarily due to the increase in short-term market interest rates that began in March 2022.

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

The average balance of interest-bearing deposits decreased $32.2 million, or 5.3%.

Average non-interest-bearing demand deposits decreased $75.5 million, or 12.8%.

The Company experienced deposit attrition during the first six months of 2023 as larger commercial depository clients moved their funds to higher interest rate alternatives outside of the banking system.

The Company also incurred a shift from non-interest bearing to interest-bearing deposits driven by the customer base.

The average rate paid on interest-bearing deposits increased 225 basis points to 2.83% in 2023 due to the increase in short-term interest rates.

Average accounts and drafts payable decreased $60.1 million, or 5.3%.

The decrease in average accounts and drafts payable was primarily driven by the decrease in transportation dollar volumes of 14.4% due to the ongoing freight recession.

Distribution of Assets, Liabilities and Shareholders' Equity;

12 unchanged sentences

192,881 5,186 2.69 279,247 8,043 2.88 304,672 8,919 2.93

Certificates of deposit — — — — — — 255 6 2.35

Short-term investments 287,243 13,720 4.78 425,004 6,429 1.51 614,390 726 0.12

3 unchanged sentences

Premises and equipment, net 24,445 19,291 17,846

Payments in excess of funding 278,185 211,809 160,692

Payments in advance of funding 234,865 278,185 211,809

Bank-owned life insurance 48,540 46,468 26,766

26 unchanged sentences

(1) Balances shown are daily averages.

(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.

(2) Interest income on loans includes net loan fees of $686,000, $684,000, and $3.4 million for 2023, 2022 and 2021, respectively.

Loan fees include $0, $167,000, and $2.6 million of PPP loan fees for 2023, 2022 and 2021, respectively.

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

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

The tax-equivalent adjustment was approximately $1.1 million, $1.7 million and $1.9 million for 2023, 2022, and 2021, respectively.

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

8 unchanged sentences

(2,351) (506) (2,857) (734) (142) (876)

Certificates of deposit — — — (6) — (6)

Short-term investments (2,671) 9,962 7,291 (291) 5,994 5,703

35 unchanged sentences

Construction 7,784 5 838 7,396 — — 16,023

PPP — — — — — — —

Other — 54 — — — — 54

10 unchanged sentences

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

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.

Loans decreased $68.6 million, or 6.3%, to $1.01 billion at December 31, 2023.

Lease finance receivables and franchise restaurant loans, which are both included in commercial and industrial loans, decreased $39.4 million, or 24.5%, and $8.6 million, or 3.9%, respectively, during 2023.

Commercial and industrial loans decreased $14.5 million, or 8.0%, during 2023.

These decreases were due to being more selective in booking new loans as a result of the decline in deposits during the year.

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 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 Company recorded a release of credit losses and off-balance sheet credit exposures of $550,000 in 2023 and a provision for credit losses of $1.4 million in 2022.

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

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

1 unchanged sentence

The ACL was $13.1 million at December 31, 2023 compared to $13.5 million at December 31, 2022.

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

The ACL represented 1.29% and 1.25% of outstanding loans at December 31, 2023 and December 31, 2022, respectively.

The allowance for unfunded commitments was $132,000 at December 31, 2023 and $232,000 at December 31, 2022.

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.

There were no nonperforming loans outstanding at December 31, 2023 and one nonperforming loan outstanding with an outstanding balance of $1.2 million, or 0.11% of total loans at December 31, 2022.

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

27 unchanged sentences

Net loans recovered — (13) (27) (20) (81)

Provision for credit losses 1,485 70 645 250 —

(Release of) provision for credit losses (450) 1,485 70 645 250

Allowance at end of year $ 13,089 $ 13,539 $ 12,041 $ 11,944 $ 10,556

30 unchanged sentences

Nonperforming assets include nonperforming loans plus foreclosed real estate.

Troubled debt restructurings are not included in nonperforming loans unless they are on non-accrual status or past due 90 days or more.

Loans with modifications to borrowers experiencing financial difficulty are not included in nonperforming loans unless they are on non-accrual status or past due 90 days or more.

It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan for which collection is not probable.

2 unchanged sentences

There was no interest income recognized on nonaccrual loans for the years ended 2023 and 2022.

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

There were no nonaccrual loans at December 31, 2023 and one nonaccrual loan of $1.2 million at December 31, 2022.

There were no foreclosed assets at December 31, 2023 or December 31, 2022.

20 unchanged sentences

2023 2022 2021

Personnel $ 106,474 $ 92,155 $ 88,062

Salaries and commissions $ 93,474 $ 85,489 $ 75,641

Share-based compensation 4,139 6,732 2,859

Net periodic pension cost (benefit) 733 (2,564) (1,839)

Other benefits 20,348 16,817 15,494

Total personnel expense $ 118,694 $ 106,474 $ 92,155

Occupancy 3,560 3,676 3,824

3 unchanged sentences

Total operating expense $ 160,155 $ 139,576 $ 120,326

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.

Total operating expenses increased 14.7% in 2023 compared to 2022.

Salaries and commissions increased $8.0 million, or 9.3%, as a result of merit increases and an increase in average full-time equivalent employees ("FTEs") of 10.8% due to strategic investments in various technology initiatives.

Share-based compensation decreased $2.6 million, reflecting the Company's financial performance and the impact on performance-based restricted stock between the periods.

Pension expense increased $3.3 million.

Despite the Company's defined benefit pension plan being frozen in the first quarter of 2021 resulting in no service cost in subsequent periods, expense increased as a result of the accounting impact of the decline in plan assets during 2022 and corresponding decline in expected return on plan assets for 2023.

Other benefits, such as 401(k) match, health insurance and payroll taxes, increased $3.5 million, or 21.0%, primarily due to the 10.8% increase in average FTEs as well as a significant increase in employer health insurance costs over prior year levels.

Other operating expense increased $7.9 million, or 35.8%, to $30.0 million.

Certain expense categories such as outside service fees and data processing have increased as the Company invests in, and transitions to, improved technology.

Income Tax Expense

1 unchanged sentence

When measured as a percent of pre-tax income, the Company’s effective tax rate was 19.5% and 18.6% in 2023 and 2022, respectively.

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.

The increase in the effective tax rate in 2023 compared to 2022 was primarily due to a lower level of tax-free interest income on municipal securities in the current year.

Investment Portfolio

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.

Investment securities decreased $127.4 million, or 16.9%, during 2023 to $627.1 million at December 31, 2023.

Treasury securities decreased $46.6 million to $108.7 million at December 31, 2023 compared to $155.3 million at December 31, 2022.

State and political securities decreased $76.1 million, or 25.8%, to $219.0 million at December 31, 2023 as a result of maturities and sales.

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

During 2023, the Company purchased investment securities totaling $15.3 million.

There was no single issuer of securities in the investment portfolio at December 31, 2023 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.

29 unchanged sentences

Deposits and Accounts and Drafts Payable

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.

(In thousands) December 31,

2023 2022 2021

Noninterest-bearing demand deposits $ 524,359 $ 642,757 $ 582,642

Interest-bearing demand deposits 616,455 614,460 638,861

Total deposits $ 1,140,814 $ 1,257,217 $ 1,221,503

Accounts and drafts payable $ 1,071,369 $ 1,067,600 $ 1,050,396

Total deposits decreased $116.4 million, or 9.3% during 2023.

Noninterest-bearing demand deposits decreased $118.4 million, or 18.4%, to $524.4 million at December 31, 2023 and interest-bearing deposits increased $2.0 million, or 0.3%, to $616.5 million at December 31, 2023.

The Company also incurred a shift from non-interest bearing to interest-bearing deposits from current customers.

Accounts and drafts payable generated by the Company in its payment processing operations increased $3.8 million, or 0.4%, to $1.07 billion, at December 31, 2023.

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 $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.

Average accounts and drafts payable decreased $60.1 million, or 5.3%, to $1.08 billion during 2023.

The decrease in average accounts and drafts payable was primarily driven by the decrease in transportation dollar volumes due to the ongoing freight recession.

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;

14 unchanged sentences

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 $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.

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 $372.5 million at December 31, 2023, an increase of $171.5 million, or 85.4%, from December 31, 2022.

The increase during 2023 is primarily attributed to decreases in investment securities, loans and payments in advance of funding, partially offset by a decrease in deposits.

At December 31, 2023, cash and cash equivalents represented 15.0% 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 $754.5 million at December 31, 2022, an increase of $81.0 million, or 12.0%, from December 31, 2021.

Total investment securities available-for-sale at fair value were $627.1 million at December 31, 2023, a decrease of $127.4 million, or 16.9%, from December 31, 2022.

Investment securities represented 25.3% of total assets at December 31, 2023.

3 unchanged sentences

At December 31, 2023, the Company had lines of credit from three banks up to a maximum of $250.0 million in aggregate collateralized by state and political subdivision securities.

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

There were not any amounts outstanding at December 31, 2023 and 2022 under any of the lines of credit.

The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize many other commercial products of the Bank.

1 unchanged sentence

Net cash flows provided by operating activities for the years 2023, 2022 and 2021 were $36.9 million, $51.6 million, and $34.5 million, respectively.

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

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

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

3 unchanged sentences

The Company anticipates the annual capital expenditures for 2024 should range from $10 million to $12 million.

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.

Capital expenditures in 2024 are expected to primarily consist of purchases of equipment and software related to the payment and information processing services business.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $39.5 million and $45.9 million for the years ended December 31, 2023 and December 31, 2022, respectively, a decrease of $6.4 million year over year.

The decrease was due to the decrease in net income of $4.8 million and lower net amortization of premium/discount on investment securities of $1.8 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 $14.7 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.

• A decrease in other operating activities, net of $4.6 million, primarily due to changes in various accounts receivable and payable;

• A decrease in stock-based compensation expense of $2.6 million due to lower Company earnings and the impact on performance based stock;

• A decrease in current income tax liability of $2.2 million;

• A change in the (release of) provision for credit losses of $1.9 million primarily due to changes in loans outstanding during the respective periods.

These factors were partially offset by an increase in the pension liability of $3.3 million.

On an overall basis, the Company's $14.7 million decrease in net cash provided by operating activities was due to higher operating expenses driven by strategic investments in technology initiatives.

Higher expense levels were partially offset by improved revenue driven by higher levels of net interest income, processing fees and financial fees.

The increase in net interest income in 2023 compared to 2022 is primarily due to the Federal Reserve’s actions to increase the Federal Funds rate throughout 2022 and into 2023, positively affecting the net interest rate margin which increased to 3.25% as compared to 2.74% in the prior year.

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.

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

Lower levels of economic activity decrease both fee income (as fewer invoices are processed) and balances of accounts and drafts payable generated (as fewer invoices are processed) from the Company’s transportation customers.

Lower levels of economic activity decrease both fee income (as fewer invoices are processed) and balances of accounts and drafts payable generated (as fewer or lower average dollar invoices are processed) from the Company’s transportation customers.

The relative level of energy costs can impact the Company’s earnings and available liquidity.

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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, 2023 as shown in Item 8, Note 2 of this report.

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.

Cash dividends paid were $16.0 million and $15.4 million in 2023 and 2022, respectively.

Shareholders’ equity was $229.8 million, or 9.3% of total assets, at December 31, 2023, an increase of $23.5 million as compared to December 31, 2022.

The increase was primarily a result of net income of $30.1 million and the decrease in accumulated other comprehensive loss of $11.9 million due to the change in market values on investment securities, partially offset by the payment of cash dividends of $16.0 million, and the repurchase of treasury shares of $5.8 million.

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

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During 2023, the Bank paid dividends of $7.5 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.

As of December 31, 2023, unappropriated retained earnings of $30.8 million were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

The Company maintains a treasury stock buyback program approved by the Board of Directors in October 2023 pursuant to which the Board of Directors has authorized the repurchase of up to 500,000 shares of the Company’s common stock and has no expiration date.

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The pace of future repurchase activity will depend on factors such as levels of regulatory capital, cash generation from operations, cash requirements for investments, repayment of debt, current stock price, business and market conditions, and other factors.

The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions.

The Company may repurchase shares from time to time on the

open market or in private transactions, including structured transactions.

The stock repurchase program may be modified or discontinued at any time.

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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 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, the Federal Reserve has increased the Federal Funds rate over the course of 2022 and into the first quarter of 2023.

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

As a result of rising inflation, the Federal Reserve increased the Federal Funds rate throughout 2022 and 2023.

The increase in the Federal Funds rate has contributed to the increase in the Company's net interest margin to 3.25% in 2023 from 2.74% in 2022, 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.

Partially as a result of declining inflation, the market is forecasting a decline in the Federal Funds rate beginning in 2024.

A decrease in the Federal Funds rate could negatively impact the Company's net interest margin and income.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

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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