CASS INFORMATION SYSTEMS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands except share and per share data) 2023 2022 Assets Cash and due from banks $ 20,908 $ 20,995 Short-term investments 351,560 179,947 Cash and cash equivalents 372,468 200,942 Securities available-for-sale, at fair value 627,117 754,468 Loans 1,014,318 1,082,906 Less allowance for credit losses 13,089 13,539 Loans, net 1,001,229 1,069,367 Payments in advance of funding 198,861 293,775 Premises and equipment, net 30,093 19,958 Investments in bank-owned life insurance 49,159 47,998 Goodwill 17,309 17,309 Other intangible assets, net 3,345 4,126 Accounts and drafts receivable from customers 110,651 95,779 Other assets 68,390 69,301 Total assets $ 2,478,622 $ 2,573,023 Liabilities and Shareholders’ Equity Liabilities: Deposits Noninterest-bearing $ 524,359 $ 642,757 Interest-bearing 616,455 614,460 Total deposits 1,140,814 1,257,217 Accounts and drafts payable 1,071,369 1,067,600 Other liabilities 36,630 41,881 Total liabilities 2,248,813 2,366,698 Shareholders’ Equity: Preferred stock, par value $ 0.50 per share; 2,000,000 shares authorized and no shares issued — — Common stock, par value $ 0.50 per share; 40,000,000 shares authorized; 15,505,772 shares issued at December 31, 2023 and 2022; 13,582,375 and 13,669,656 shares outstanding at December 31, 2023 and 2022, respectively. 7,753 7,753 Additional paid-in capital 208,007 207,422 Retained earnings 145,782 131,682 Common shares in treasury, at cost ( 1,923,397 shares at December 31, 2023 and 1,836,116 shares at December 31, 2022, respectively) ( 84,264 ) ( 81,211 ) Accumulated other comprehensive loss ( 47,469 ) ( 59,321 ) Total shareholders’ equity 229,809 206,325 Total liabilities and shareholders’ equity $ 2,478,622 $ 2,573,023 See accompanying notes to consolidated financial statements. 40 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, (In thousands except per share data) 2023 2022 2021 Fee Revenue and Other Income: Processing fees $ 79,566 $ 76,470 $ 74,589 Financial fees 45,985 43,757 32,733 Other 4,916 4,755 2,369 Total fee revenue and other income 130,467 124,982 109,691 Interest Income: Interest and fees on loans 50,825 39,460 35,178 Interest and dividends on securities: Taxable 14,118 10,083 2,547 Exempt from federal income taxes 4,097 6,354 7,046 Interest on federal funds sold and other short-term investments 13,720 6,429 726 Total interest income 82,760 62,326 45,497 Interest Expense: Interest on deposits 16,150 3,482 1,171 Interest on short-term borrowings 116 — — Total interest expense 16,266 3,482 1,171 Net interest income 66,494 58,844 44,326 (Release of) provision for credit losses ( 550 ) 1,350 ( 130 ) Net interest income after (release of) provision for credit losses 67,044 57,494 44,456 Total net revenue 197,511 182,476 154,147 Operating Expense: Personnel 118,694 106,474 92,155 Occupancy 3,560 3,676 3,824 Equipment 7,138 6,668 6,745 Amortization of intangible assets 780 680 859 Other operating 29,983 22,078 16,743 Total operating expense 160,155 139,576 120,326 Income before income tax expense 37,356 42,900 33,821 Income tax expense 7,297 7,996 5,217 Net income $ 30,059 $ 34,904 $ 28,604 Basic Earnings Per Share $ 2.22 $ 2.58 $ 2.03 Diluted Earnings Per Share 2.18 2.53 2.00 See accompanying notes to consolidated financial statements. 41 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, (In thousands) 2023 2022 2021 Comprehensive Income: Net income $ 30,059 $ 34,904 $ 28,604 Other comprehensive income (loss): Net unrealized gain (loss) on securities available-for-sale 12,605 ( 79,746 ) ( 10,447 ) Tax effect ( 3,000 ) 18,981 2,487 Reclassification adjustments for losses (gains) included in net income 173 ( 15 ) ( 51 ) Tax effect ( 41 ) 3 12 FASB ASC 715 pension adjustment 2,550 1,504 11,363 Tax effect ( 607 ) ( 358 ) ( 2,705 ) Foreign currency translation adjustments, net of tax 172 ( 143 ) ( 191 ) Other comprehensive income (loss) 11,852 ( 59,774 ) 468 Total comprehensive income (loss) $ 41,911 $ ( 24,870 ) $ 29,072 See accompanying notes to consolidated financial statements. 42 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 2023 2022 2021 Cash Flows From Operating Activities: Net income $ 30,059 $ 34,904 $ 28,604 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 780 680 859 Net amortization of premium/discount on investment securities 4,473 6,275 7,328 Depreciation 4,189 4,021 4,313 Losses (gains) on sales of securities 173 ( 15 ) ( 51 ) Stock-based compensation expense 4,139 6,732 2,859 (Release of) provision for credit losses ( 550 ) 1,350 ( 130 ) Deferred income tax benefit ( 284 ) ( 1,163 ) ( 698 ) (Decrease) increase in current income tax liability ( 1,481 ) 724 206 Increase (decrease) in pension liability 806 ( 2,484 ) ( 1,811 ) Increase in accounts receivable ( 3,841 ) ( 2,520 ) ( 602 ) Other operating activities, net ( 1,527 ) 3,104 ( 6,330 ) Net cash provided by operating activities 36,936 51,608 34,547 Cash Flows From Investing Activities: Proceeds from sales of securities available-for-sale 111,583 3,838 63,774 Proceeds from maturities of securities available-for-sale 39,233 61,209 96,951 Purchases of securities available-for-sale ( 15,332 ) ( 232,083 ) ( 494,226 ) Net decrease (increase) in loans 68,588 ( 122,326 ) ( 68,664 ) Purchase of bank-owned life insurance — ( 4,000 ) ( 25,119 ) Decrease (increase) in payments in advance of funding 94,914 ( 2,348 ) ( 96,864 ) Purchases of premises and equipment, net ( 14,324 ) ( 5,866 ) ( 4,369 ) Asset acquisition of TouchPoint — ( 4,814 ) — Net cash provided by (used in) investing activities 284,662 ( 306,390 ) ( 528,517 ) Cash Flows From Financing Activities: Net (decrease) increase in noninterest-bearing demand deposits ( 118,398 ) 60,115 89,138 Net (decrease) increase in interest-bearing demand and savings deposits ( 34,106 ) ( 17,838 ) 90,310 Net increase (decrease) in time deposits 36,101 ( 6,563 ) ( 8,801 ) Net (increase) decrease in accounts and drafts receivable from customers ( 14,872 ) ( 90,787 ) 6 Net increase in accounts and drafts payable 3,769 17,204 215,010 Cash dividends paid ( 15,959 ) ( 15,442 ) ( 15,446 ) Purchase of common shares for treasury ( 5,773 ) ( 5,299 ) ( 30,997 ) Other financing activities, net ( 834 ) ( 594 ) ( 850 ) Net cash (used in) provided by financing activities ( 150,072 ) ( 59,204 ) 338,370 Net increase (decrease) in cash and cash equivalents 171,526 ( 313,986 ) ( 155,600 ) Cash and cash equivalents at beginning of year 200,942 514,928 670,528 Cash and cash equivalents at end of year $ 372,468 $ 200,942 $ 514,928 Supplemental information: Cash paid for interest $ 15,697 $ 3,431 $ 1,194 Cash paid for income taxes 9,300 8,396 5,637 See accompanying notes to consolidated financial statements. 43 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands except per share data) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balance, December 31, 2020 $ 7,753 $ 204,875 $ 99,062 $ ( 50,515 ) $ ( 15 ) $ 261,160 Net income 28,604 28,604 Cash dividends ($ 1.09 per share) ( 15,446 ) ( 15,446 ) Issuance of 85,056 common shares pursuant to stock-based compensation plan, net ( 2,939 ) 2,249 ( 690 ) Exercise of SARs ( 519 ) 359 ( 160 ) Stock-based compensation expense 2,859 2,859 Purchase of 713,857 common shares ( 30,997 ) ( 30,997 ) Other comprehensive income 468 468 Balance, December 31, 2021 $ 7,753 $ 204,276 $ 112,220 $ ( 78,904 ) $ 453 $ 245,798 Net income 34,904 34,904 Cash dividends ($ 1.13 per share) ( 15,442 ) ( 15,442 ) Issuance of 82,172 common shares pursuant to stock-based compensation plan, net ( 2,727 ) 2,414 ( 313 ) Exercise of SARs ( 859 ) 578 ( 281 ) Stock-based compensation expense 6,732 6,732 Purchase of 130,374 common shares ( 5,299 ) ( 5,299 ) Other comprehensive income ( 59,774 ) ( 59,774 ) Balance, December 31, 2022 $ 7,753 $ 207,422 $ 131,682 $ ( 81,211 ) $ ( 59,321 ) $ 206,325 Net income 30,059 30,059 Cash dividends ($ 1.17 per share) ( 15,959 ) ( 15,959 ) Issuance of 84,366 common shares pursuant to stock-based compensation plan, net ( 3,334 ) 2,616 ( 718 ) Exercise of SARs ( 238 ) 122 ( 116 ) Stock-based compensation expense 4,157 ( 18 ) 4,139 Purchase of 150,541 common shares ( 5,773 ) ( 5,773 ) Other comprehensive loss 11,852 11,852 Balance, December 31, 2023 $ 7,753 $ 208,007 $ 145,782 $ ( 84,264 ) $ ( 47,469 ) $ 229,809 See accompanying notes to consolidated financial statements. 44 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies Summary of Operations The Company provides payment and information services, which include processing and payment of transportation, energy, telecommunications and environmental invoices. These services include the acquisition and management of data, information delivery and financial exchange. The consolidated balance sheet captions, “Accounts and drafts payable” and “Payments in advance of funding,” represent the Company’s resulting financial position related to the payment services that are performed for customers. The Company also provides a full range of banking services to individual, corporate and institutional customers through the Bank, its wholly owned bank subsidiary. Basis of Presentation The accounting and reporting policies of the Company and its subsidiaries conform to U.S. GAAP. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany transactions. Certain amounts in the 2022 and 2021 consolidated financial statements have been reclassified to conform to the 2023 presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity. Use of Estimates In preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statements. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold and other short-term investments to be cash and cash equivalents. Investment in Debt Securities The Company classifies its investment securities as available-for-sale. Securities classified as available-for-sale are carried at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and reported in accumulated other comprehensive income, a component of shareholders’ equity. Securities are periodically evaluated for credit losses in accordance with the guidance provided in FASB ASC Topic 326, Financial Instruments – Credit Losses ("ASC 326"). For available for sale investment securities in an unrealized loss position, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it is more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an allowance for credit losses is recorded. The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis. Any impairment not recorded through the provision for credit losses would be recognized in other comprehensive income. Changes in the allowance for credit losses would be recorded as a provision for credit losses on the consolidated statements of income. Losses would be charged against the allowance for credit losses on securities when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the conditions regarding intent or requirement to sell is met. Premiums and discounts are amortized or accreted to interest income over the expected lives of the respective securities using the level-yield method. Interest income is recognized when earned. Gains and losses are calculated using the specific identification method. Loans Interest on loans is recognized based upon the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when there is reasonable doubt as to the collectability of principal or interest. Subsequent payments received on such loans are applied to principal if there is any doubt as to the collectability of such principal; otherwise, these receipts are recorded as interest income. The accrual of interest on a loan is resumed when the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Loan origination and commitment fees on originated loans, net of certain direct loan origination costs, are deferred and amortized to interest income using the level-yield method over the estimated lives of the related loans. 45 Table of Contents Allowance for Credit Losses The ACL is increased by provisions charged to expense and is available to absorb charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the ACL. Management’s approach provides for estimated current expected credit losses on loans in accordance with ASC 326. These estimates are based upon a number of factors, such as payment history, financial condition of the borrower, expected future cash flows and collateral exposure. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries for amounts previously charged off and expected to be charged off do not exceed the aggregate of amounts previously charged off and expected to be charged off. Management estimated the allowance balance using relevant available information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts based on economic factors, such as GDP. Historical credit loss experience, of both the Company and similar peer banks, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for concentration risk, asset quality trends, borrower’s ability to pay, collateral, and other environmental factors. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACL because a wide variety of factors and inputs are considered in estimating the allowance 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. The ACL is measured on a collective pool basis when similar risk characteristics exist. Management believes the ACL is adequate to absorb expected losses in the loan portfolio. Loans The Company has identified the following portfolio segments: Commercial & Industrial (“C&I”) – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries, franchise lending, and equipment financing to companies of all sizes. These loans are generally collateralized by inventory, accounts receivable, equipment, and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the borrower. However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans supported by borrowing bases that fluctuate depending on the amount of underlying collateral. Commercial Real Estate (“CRE”) – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay and material decreases in the value of the real estate being held as collateral. Faith-based CRE – Faith-based CRE loans include loans to faith-based ministries for which the Company holds real property as collateral. The primary risks of faith-based CRE loans include the borrower’s inability to pay and material decreases in the value of the real estate being held as collateral. Construction and Land Development – The Company originates loans to finance construction projects including faith-based and commercial projects. Construction loans are generally collateralized by first liens on the real estate and have floating interest rates. The primary risks of construction loans are construction completion and timing risk. Adverse economic conditions may negatively impact the borrowers’ ability to complete the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The ACL is calculated as the difference between the amortized cost basis of the loan portfolio and the projections from the weighted-average remaining maturity ("WARM") model that the Company developed. The WARM model utilizes an attrition analysis, including events such as payoffs, matured loans, and renewals in the borrowers’ control, to anticipate the length of time it would take for each portfolio segment to runoff. Management incorporates a one-year GDP forecast and an immediate reversion to peer historical loss rates to determine the annual charge off rates over the estimated life of the loans. After the reasonable and supportable forecast period, the model reverts to long-run /historical average loss rates of its peers. However, for the faith-based CRE ACL, loss rates are determined using the Company’s long-run historical averages, as this loan segment is unique to the Company and does not represent a more than nominal percentage of peer loan portfolios. The economic forecast is based on management’s assessment of the length and pattern of the current economic 46 Table of Contents cycle. The resulting annual charge off rate determined for each year in the WARM model is applied to the loan balances estimated in the attrition analysis. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing forecast scenarios. Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, value of underlying collateral, loan review and audit results, asset quality and portfolio trends, loan portfolio growth and loan concentrations. The Company has elected to exclude accrued interest receivable ("AIR") from the allowance for credit losses calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on the Company’s financial condition, liquidity or results of operations. Various regulatory agencies, as an integral part of the examination process, periodically review the ACL. Such agencies may require the Company to recognize additions to the ACL or reserve increases to adversely graded classified loans based on information available to them at the time of their examinations. The ACL is decreased by net charge-offs and is increased by provisions for credit losses that are charged to the consolidated statements of operations. Charge-offs, if any, are typically measured for each loan based on a thorough analysis of the most probable source of repayment, such as the present value of the loan’s expected future cash flows, the loan’s estimated fair value, or the estimated fair value of the underlying collateral less costs of disposition for collateral-dependent loans. When it is determined that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the ACL. Unfunded loan commitments In addition to the ACL for funded loans, the Company maintains reserves to cover the risk of loss associated with off-balance sheet unfunded loan commitments. The allowance for off-balance sheet credit losses is maintained within other liabilities in the statements of financial condition. Under the CECL framework, adjustments to this liability are recorded as provision for credit losses in the consolidated statements of operations. Unfunded loan commitment balances are evaluated by loan segment. In order to establish the required level of reserve, the Company applies average historical utilization rates and ACL loan model loss rates for each loan segment to the outstanding unfunded commitment balances. Investment securities Management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company will evaluate whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss. For U.S. agency-backed securities where the risk of nonpayment of the amortized cost basis is zero, the Company will not measure expected credit losses on these securities. When the loss is not considered a result of credit loss, the cost basis of the security is written down to fair value, with the loss charge recognized in AOCI. Credit losses are not estimated for AIR from investment securities as interest deemed uncollectible is written off through interest income. Individually Evaluated Loans A loan is considered individually evaluated when it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Individually evaluated loans are generally measured based on the expected future cash flows and discounted at the loan's effective interest rate. Alternatively, reference to an observable market price could be used to individually evaluate loans, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures individually evaluated loans based on the fair value of the collateral when the Company determines foreclosure is probable. The Company uses its methods as discussed above for recognizing interest on individually evaluated loans. 47 Table of Contents Foreclosed Assets Real estate acquired as a result of foreclosure is initially recorded at fair value less estimated selling costs. Fair value is generally determined through the receipt of appraisals. Any write down to fair value at the time the property is acquired is recorded as a charge-off to the allowance for credit losses. Any decline in the fair value of the property subsequent to acquisition is recorded as a charge to non-interest expense. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated useful lives of the assets, or the respective lease terms for leasehold improvements, using straight-line and accelerated methods. Estimated useful lives do not exceed 40 years for buildings, the lesser of 10 years or the life of the lease for leasehold improvements and range from 3 to 7 years for software, equipment, furniture and fixtures. Maintenance and repairs are charged to expense as incurred. Intangible Assets Cost in excess of fair value of net assets acquired has resulted from business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective estimated useful lives. Periodically, the Company reviews intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable. Based on those reviews, adjustments of recorded amounts have not been required. Non-marketable Equity Investments The Company accounts for non-marketable equity investments, in which it holds less than a 20 % ownership, as equity investments without readily determinable fair values. As a result, the carrying value of the investment is determined under the measurement alternative of cost, less impairment (if any), adjusted for fair value changes when observable prices are available. The Company periodically evaluates for impairment of these investments. In performing this evaluation, the Company considers various factors including the investee's financial condition, results of operations, operating trends and other financial ratios. Non-marketable equity investments are included in other assets on the consolidated balance sheets. Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon reissuance, treasury stock is reduced based upon the average cost basis of shares held. Comprehensive Income Comprehensive income consists of net income, changes in net unrealized gains (losses) on available-for-sale securities and pension liability adjustments and is presented in the accompanying consolidated statements of shareholders' equity and consolidated statements of comprehensive income. Processing Fees A majority of the Company’s fee revenue is attributable to providing services related to processing and payment of invoices. These services include invoice processing, transportation invoice rating, payment processing and services, auditing, and the generation of accounting and transportation information. The Company also processes, pays and generates management information from electric, gas, telecommunications, environmental, and other invoices. The specific payment and information processing services provided to each customer are developed individually to meet each customer’s specific requirements. The Company enters into service agreements with customers typically for fixed fees per transaction that are invoiced monthly. Revenues are recognized in the period services are rendered and earned under the service agreements, as long as collection is reasonably assured. Financial fees The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance. In the event that management determines it is more likely than not that it will not be able to realize all or part of net deferred tax assets in the future, the Company adjusts the recorded value of deferred tax assets, which would result in a direct charge to income tax expense in the period that such determination is made. Likewise, the Company will reverse the valuation allowance when realization of the deferred tax asset is expected. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company and its subsidiaries file U.S. federal and certain state income tax returns on a consolidated basis. In addition, certain state jurisdictions are filed on a separate company basis by the Company or its subsidiaries. 48 Table of Contents The Company recognizes and measures income tax benefits using a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized; and 2) the benefit must be measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized for a tax position in this model and the tax benefit claimed on a tax return is treated as an unrecognized tax benefit. The Company recognizes income tax related interest and penalties in income tax expense. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding and the weighted average number of potential common shares outstanding. Stock-Based Compensation The Company follows FASB ASC 718, Accounting for Stock Options and Other Stock-based Compensation (“ASC 718”), which requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. ASC 718 also requires that excess tax benefits related to stock option exercises and restricted stock awards be reflected as financing cash inflows instead of operating cash inflows. Pension Plans The amounts recognized in the consolidated financial statements related to pension are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2023, rate of increase in mortality rates. These assumptions are updated annually and are disclosed in Note 10. The Company follows FASB ASC 715, Compensation – Retirement Benefits (“ASC 715”), which requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end. Fair Value Measurements The Company follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value in GAAP, and outlines disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy for valuation techniques is used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. Financial instrument valuations are considered Level 1 when they are based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instrument valuations use quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Financial instrument valuations are considered Level 3 when they are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable, and when determination of the fair value requires significant management judgment or estimation. The Company records securities available for sale at their fair values on a recurring basis using Level 2 valuations. Additionally, the Company records individually evaluated credits and other real estate owned at their fair value on a nonrecurring basis. The nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or impairment write-downs of individual assets. Impact of New and Not Yet Adopted Accounting Pronouncements In March 2022, the FASB issued 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL methodology for estimating allowances for credit losses and enhances the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. Instead, entities are required to evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or continuation of an existing loan. In addition, the amendments require a public business entity to disclose current period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The implementation of this ASU effective January 1, 2023 did not have a material impact on the consolidated financial statements. In October 2023, the FASB issued 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative ("ASU 2023-06"). This ASU amends the ASC to incorporate certain disclosure requirements from SEC Release No. 33-10532 - Disclosure Update and Simplification that was issued in 2018. 49 Table of Contents The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. ASU 2023-06 is not expected to have a significant impact on the Company's financial statements. In November 2023, the FASB issued 2023-07, Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). This ASU expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment's profit or loss and assets that are currently required annually. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is not expected to have a significant impact on the Company's financial statements. In December 2023, the FASB issued 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). This ASU requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. It also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. ASU 2023-09 is not expected to have a significant impact on the Company's financial statements. Note 2 Capital Requirements and Regulatory Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital and common equity Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes that as of December 31, 2023 and 2022, the Company and the Bank met all capital adequacy requirements to which they are subject. The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 2023, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, common equity Tier I risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company has traditionally paid a quarterly cash dividend to its shareholders. Subsidiary dividends can be a significant source of funds for payment of dividends by the Company to its shareholders. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its “well capitalized” status, at 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. In addition to regulatory requirements and considerations, any payment of dividends in the future will depend on the Company’s earnings, financial condition and other factors considered relevant by the Company’s Board of Directors. There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 2023 and 2022. 50 Table of Contents The Company’s and the Bank’s actual and required capital amounts and ratios are as follows: Actual Capital Requirements Requirement to be Well-Capitalized (In thousands) Amount Ratio Amount Ratio Amount Ratio At December 31, 2023 Total capital (to risk-weighted assets) Cass Information Systems, Inc. $ 269,580 15.49 % $ 139,266 8.00 % $ N/A N/A % Cass Commercial Bank 204,584 19.04 85,964 8.00 107,455 10.00 Common Equity Tier I Capital (to risk-weighted assets) Cass Information Systems, Inc. 256,359 14.73 78,337 4.50 N/A N/A Cass Commercial Bank 192,104 17.88 48,355 4.50 69,846 6.50 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. 256,359 14.73 104,449 6.00 N/A N/A Cass Commercial Bank 192,104 17.88 64,473 6.00 85,964 8.00 Tier I capital (to average assets) Cass Information Systems, Inc. 256,359 10.71 95,760 4.00 N/A N/A Cass Commercial Bank 192,104 12.49 61,526 4.00 76,908 5.00 At December 31, 2022 Total capital (to risk-weighted assets) Cass Information Systems, Inc. $ 257,313 13.52 % $ 152,306 8.00 % $ N/A N/A % Cass Commercial Bank 186,075 16.00 93,044 8.00 116,305 10.00 Common Equity Tier I Capital (to risk-weighted assets) Cass Information Systems, Inc. 243,774 12.80 85,672 4.50 N/A N/A Cass Commercial Bank 172,848 14.86 52,337 4.50 75,598 6.50 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. 243,774 12.80 114,229 6.00 N/A N/A Cass Commercial Bank 172,848 14.86 69,783 6.00 93,044 8.00 Tier I capital (to average assets) Cass Information Systems, Inc. 243,774 9.52 102,386 4.00 N/A N/A Cass Commercial Bank 172,848 10.77 64,196 4.00 80,245 5.00 Note 3 Investment Securities Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale at December 31, 2023 and 2022 are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore falls into the Level 2 category. The table below presents the balances of securities available-for-sale 51 Table of Contents measured at fair value on a recurring basis. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of debt and equity securities are summarized as follows: December 31, 2023 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and political subdivisions $ 235,297 $ 4 $ ( 16,266 ) $ 219,035 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 188,307 — ( 30,508 ) 157,799 Corporate bonds 111,109 — ( 8,769 ) 102,340 Treasury securities 109,836 — ( 1,115 ) 108,721 Asset backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises 40,368 — ( 1,146 ) 39,222 Total $ 684,917 $ 4 $ ( 57,804 ) $ 627,117 December 31, 2022 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and political subdivisions $ 317,376 $ 54 $ ( 22,304 ) $ 295,126 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 205,175 — ( 31,236 ) 173,939 Corporate bonds 96,348 — ( 11,251 ) 85,097 Treasury Securities 158,935 — ( 3,652 ) 155,283 Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 47,213 — ( 2,190 ) 45,023 Total $ 825,047 $ 54 $ ( 70,633 ) $ 754,468 The fair values of securities with unrealized losses are as follows: December 31, 2023 Less than 12 months 12 months or more Total (In thousands) Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses State and political subdivisions $ 63,198 $ 220 $ 152,854 $ 16,046 $ 216,052 $ 16,266 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises — — 157,799 30,508 157,799 30,508 Corporate bonds 19,545 455 82,795 8,314 102,340 8,769 Treasury securities — — 108,721 1,115 108,721 1,115 Asset backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises — — 39,222 1,146 39,222 1,146 Total $ 82,743 $ 675 $ 541,391 $ 57,129 $ 624,134 $ 57,804 52 Table of Contents December 31, 2022 Less than 12 months 12 months or more Total (In thousands) Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses State and political subdivisions $ 214,919 $ 8,958 $ 47,474 $ 13,346 $ 262,393 $ 22,304 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 53,732 6,135 118,017 25,101 171,749 31,236 Corporate bonds 32,517 3,629 47,580 7,622 80,097 11,251 Treasury securities 155,283 3,652 — — 155,283 3,652 Asset backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises — — 47,213 2,190 47,213 2,190 Total $ 456,451 $ 22,374 $ 260,284 $ 48,259 $ 716,735 $ 70,633 There were 275 securities, or 98.9 %, in an unrealized loss position as of December 31, 2023 compared to 311 securities, or 91.7 %, in an unrealized loss position as of December 31, 2022. The unrealized losses at December 31, 2023 were primarily attributable to changes in market interest rates after the securities were purchased. The Company does not currently intend to sell, and based on current conditions, the Company does not believe it will be required to sell these available-for-sale securities before the recovery of the amortized cost basis, which may be the maturity dates of the securities. Therefore, the unrealized losses are recorded in accumulated other comprehensive loss. Of these securities, 210 , or 75.5 %, were in an unrealized loss position for greater than 12 months at December 31, 2023. At December 31, 2023 and December 31, 2022, the Company had not recorded an allowance for credit losses on securities. The amortized cost and fair value of debt and equity securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. December 31, 2023 (In thousands) Amortized Cost Fair Value Due in 1 year or less $ 130,388 $ 129,213 Due after 1 year through 5 years 136,710 134,663 Due after 5 years through 10 years 202,069 178,754 Due after 10 years 215,750 184,487 Total $ 684,917 $ 627,117 There were no securities pledged to secure public deposits or for other purposes at December 31, 2023. Proceeds from sales of investment securities classified as available-for-sale were $ 111.6 million in 2023, $ 3.8 million in 2022, and $ 63.8 million in 2021. Gross realized gains on the sales in 2023, 2022, and 2021 were $ 187,000 , $ 15,000 , and $ 55,000 , respectively. Gross realized losses on the sales in 2023, 2022, and 2021 were $ 360,000 , $ 0 and $ 4,000 , respectively. Note 4 Loans The Company originates commercial, industrial and real estate loans to businesses and faith-based ministries throughout the metropolitan St. Louis, Missouri area, Colorado Springs, Colorado and other selected cities in the United States. The Company does not have any particular concentration of credit in any one economic sector; however, a substantial portion of the commercial and industrial loans is extended to privately-held commercial companies and franchises in these market areas and are generally secured by the assets of the business. The Company also has a substantial portion of real estate 53 Table of Contents loans secured by mortgages that are extended to faith-based ministries in its market area and selected cities in the United States. A summary of loan categories is as follows: December 31, (In thousands) 2023 2022 Commercial and industrial $ 498,502 $ 561,616 Real estate: Commercial: Mortgage 118,371 108,166 Construction 8,233 17,874 Faith-based: Mortgage 381,368 387,114 Construction 7,790 8,094 Other 54 42 Total loans $ 1,014,318 $ 1,082,906 The following table presents the aging of loans by loan categories at December 31, 2023: Performing Nonperforming (In thousands) Current 30-59 Days 60-89 Days 90 Days and Over Non- accrual Total Loans Commercial and industrial $ 498,502 $ — $ — $ — $ — $ 498,502 Real estate Commercial: Mortgage 118,371 — — — — 118,371 Construction 8,233 — — — — 8,233 Faith-based: Mortgage 381,368 — — — — 381,368 Construction 7,790 — — — — 7,790 PPP — — — — — — Other 54 — — — — 54 Total $ 1,014,318 $ — $ — $ — $ — $ 1,014,318 54 Table of Contents The following table presents the aging of loans by loan categories at December 31, 2022: Performing Nonperforming (In thousands) Current 30-59 Days 60-89 Days 90 Days and Over Non- accrual Total Loans Commercial and industrial $ 560,466 $ — $ — $ — $ 1,150 $ 561,616 Real estate Commercial: Mortgage 108,166 — — — — 108,166 Construction 17,874 — — — — 17,874 Faith-based: Mortgage 387,114 — — — — 387,114 Construction 8,094 — — — — 8,094 PPP — — — — — — Other 42 — — — — 42 Total $ 1,081,756 $ — $ — $ — $ 1,150 $ 1,082,906 The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2023: (In thousands) Loans Subject to Normal Monitoring (1) Performing Loans Subject to Special Monitoring (2) Nonperforming Loans Subject to Special Monitoring (2) Total Loans Commercial and industrial $ 498,502 $ — $ — $ 498,502 Real estate Commercial: Mortgage 118,371 — — 118,371 Construction 8,233 — — 8,233 Faith-based: Mortgage 375,865 5,503 — 381,368 Construction 7,790 — — 7,790 PPP — — — — Other 54 — — 54 Total $ 1,008,815 $ 5,503 $ — $ 1,014,318 (1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk and have the apparent ability to satisfy their loan obligation. (2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a higher level of management attention. 55 Table of Contents The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2022: (In thousands) Loans Subject to Normal Monitoring (1) Performing Loans Subject to Special Monitoring (2) Nonperforming Loans Subject to Special Monitoring (2) Total Loans Commercial and industrial $ 549,241 $ 11,225 $ 1,150 $ 561,616 Real estate Commercial: Mortgage 108,166 — — 108,166 Construction 17,874 — — 17,874 Faith-based: Mortgage 386,169 945 — 387,114 Construction 8,094 — — 8,094 PPP — — — — Other 42 — — 42 Total $ 1,069,586 $ 12,170 $ 1,150 $ 1,082,906 (1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk and have the apparent ability to satisfy their loan obligation. (2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a higher level of management attention. 56 Table of Contents The Company adopted Accounting Standards Update ASU 2022-02, effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination thereof, among other things. The following table shows the amortized cost of loans at December 31, 2023 that were both experiencing financial difficulty and modified during the year ended December 31, 2023, segregated by category and type of modification. (In thousands) Payment Delay Term Extension Interest Rate Reduction Combination Term Extension and Interest Rate Reduction Percentage of Total Loans Held for Investment Commercial and industrial $ — $ 22,354 $ — $ — 4.48 % Total $ — $ 22,354 $ — $ — 2.20 % There were three loans modified during the year ended December 31, 2023. The terms were extended by periods of two to four years, and there was not an interest rate reduction associated with the modifications. There were no commitments to lend additional funds to these borrowers at December 31, 2023. The following table shows the performance of loans that have been modified to borrowers experiencing financial difficulty during the year ended December 31, 2023. (In thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Commercial and industrial $ 22,354 $ — $ — $ — $ — Total $ 22,354 $ — $ — $ — $ — There were no modified loans that had a payment default during the year ended December 31, 2023 and that had been modified due to the borrower experiencing financial difficulty within the 12 previous months preceding the default. Upon the Company's determination that a modified loan has subsequently been deemed uncollectible, the loan is written off. There were no loans written off during the year ended December 31, 2023. Prior to the adoption of ASU 2022-02, there were no loans considered troubled debt restructurings as of December 31, 2022. The Company had no loans evaluated for expected credit losses on an individual basis as of December 31, 2023. The Company had one loan that was considered an individually evaluated credit at December 31, 2022, with no specific allowance. This loan was paid off in full in January 2023. There were no foreclosed loans recorded as other real estate owned as of December 31, 2023 or December 31, 2022. A summary of the ACL by category for the period ended December 31, 2023 is as follows: (In thousands) C&I CRE Faith-based CRE Construction Total Allowance for credit losses on loans: Balance at December 31, 2022 $ 5,978 $ 940 $ 6,437 $ 184 $ 13,539 (Release of) provision for credit losses (1) ( 566 ) 153 39 ( 76 ) ( 450 ) Balance at December 31, 2023 $ 5,412 $ 1,093 $ 6,476 $ 108 $ 13,089 (1) For the period ended December 31, 2023, there was a release of credit losses of $ 100,000 for unfunded commitments. 57 Table of Contents A summary of the ACL by category for the period ended December 31, 2022 is as follows: (In thousands) C&I CRE Faith-based CRE Construction Total Allowance for credit losses on loans: Balance at January 1, 2021 $ 5,034 $ 1,031 $ 5,684 $ 292 $ 12,041 Provision for (release of) credit losses (1) 931 ( 91 ) 753 ( 108 ) 1,485 Recoveries 13 — — — 13 Balance at December 31, 2022 $ 5,978 $ 940 $ 6,437 $ 184 $ 13,539 (1) For the period ended December 31, 2022, there was a release of credit losses of $ 135,000 for unfunded commitments. As of December 31, 2023 and 2022, there were no loans to executive officers or directors, or their affiliates. Note 5 Premises and Equipment A summary of premises and equipment is as follows: December 31, (In thousands) 2023 2022 Land $ 873 $ 873 Buildings 15,176 14,903 Leasehold improvements 2,052 2,044 Furniture, fixtures and equipment 16,333 14,668 Software 44,345 31,956 Total 78,779 64,444 Less accumulated depreciation 48,686 44,486 Total premises and equipment, net $ 30,093 $ 19,958 Total depreciation charged to expense in 2023, 2022 and 2021 amounted to $ 4.2 million, $ 4.0 million, and $ 4.3 million, respectively. Note 6 Acquired Intangible Assets The Company accounts for intangible assets in accordance with FASB ASC 350, Goodwill and Other Intangible Assets , which requires that intangibles with indefinite useful lives be tested annually for impairment, or when management deems there is a triggering event, and those with finite useful lives be amortized over their useful lives. Details of the Company’s intangible assets are as follows: 58 Table of Contents December 31, 2023 December 31, 2022 (In thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Assets eligible for amortization: Customer lists $ 6,470 $ ( 4,851 ) $ 6,470 $ ( 4,561 ) Patent 72 ( 36 ) 72 ( 32 ) Software 3,212 ( 1,933 ) 3,212 ( 1,508 ) Trade Name 373 ( 70 ) 373 ( 42 ) Other 500 ( 392 ) 500 ( 358 ) Unamortized intangible assets: Goodwill 17,309 — 17,309 — Total intangible assets $ 27,936 $ ( 7,282 ) $ 27,936 $ ( 6,501 ) Customer lists are amortized over 7 to 10 years; patents over 18 years, software over 3 years to 7 years, trade name over 10 years to 20 years and other intangible assets over 15 years. Amortization of intangible assets amounted to $ 780,000 and $ 680,000 for the years ended December 31, 2023, and 2022, respectively. Estimated future amortization of intangibles is $ 738,000 in 2024, $ 730,000 in 2025, $ 582,000 in 2026, $ 262,000 in 2027, and $ 253,000 in 2028. Note 7 Interest-Bearing Deposits I nterest-bearing deposits consist of the following: December 31, (In thousands) 2023 2022 Interest-bearing demand deposits $ 532,507 $ 567,426 Savings deposits 7,226 6,413 Time deposits: Less than $100 5,266 2,526 $100 to less than $250 48,540 20,137 $250 or more (1) 22,916 17,958 Total $ 616,455 $ 614,460 Weighted average interest rate 3.16 % 1.74 % (1) The scheduled maturities of time deposits not covered by deposit insurance consist of $ 21.9 million within one year and $ 1.1 million within one to three years. Interest expense consists of the following: December 31, (In thousands) 2023 2022 2021 Interest-bearing demand deposits $ 14,056 $ 3,118 $ 582 Savings deposits 113 38 9 Time deposits: Less than $100 1,276 145 332 $100 to less than $250 288 79 109 $250 or more 417 102 139 Total $ 16,150 $ 3,482 $ 1,171 59 Table of Contents The scheduled maturities of time deposits are summarized as follows: December 31, 2023 2022 (In thousands) Amount Percent of Total Amount Percent of Total Due within: One year $ 72,616 94.6 % $ 37,925 93.3 % Two years 2,941 3.8 % 1,773 4.4 % Three years 1,098 1.4 % 797 2.0 % Four years 39 0.1 % 88 0.2 % Five years 28 0.1 % 38 0.1 % Total $ 76,722 100.0 % $ 40,621 100.0 % Note 8 Unused Available Lines of Credit As of December 31, 2023, 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, 2023, the Bank had secured lines of credit with the Federal Home Loan Bank of $ 228.3 million collateralized by commercial mortgage loans. As of 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 as of December 31, 2023 and 2022 under any of the lines of credit. Note 9 Common Stock and Earnings per Share The table below shows activity in the outstanding shares of the Company’s common stock during 2023. 2023 Shares outstanding at January 1 13,669,656 Issuance of common stock: Employee restricted stock grants 12,780 Employee restricted stock units vested 9,843 Performance-based stock vested 15,646 Employee SARs exercised 2,974 Directors’ stock grants 22,415 Shares repurchased ( 150,541 ) Shares forfeited ( 398 ) Shares outstanding at December 31 13,582,375 Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding and the weighted average number of potential common shares outstanding. Under the treasury stock method, stock appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the SAR price during a period. The calculations of basic and diluted earnings per share are as follows: 60 Table of Contents December 31, (In thousands except share and per share data) 2023 2022 2021 Basic: Net income $ 30,059 $ 34,904 $ 28,604 Weighted average common shares outstanding 13,530,005 13,552,503 14,091,773 Basic earnings per share $ 2.22 $ 2.58 $ 2.03 Diluted: Net income $ 30,059 $ 34,904 $ 28,604 Weighted average common shares outstanding 13,530,005 13,552,503 14,091,773 Effect of dilutive restricted stock, performance based restricted stock (“PBRS”), and SARs 286,011 255,526 238,103 Weighted average common shares outstanding assuming dilution 13,816,016 13,808,029 14,329,876 Diluted earnings per share $ 2.18 $ 2.53 $ 2.00 Note 10 Employee Benefit Plans Defined Benefit Plan The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers eligible employees. Effective December 31, 2016, the Plan was closed to all new participants. Additionally, the Company froze the benefits of the Plan as of February 28, 2021. As such, subsequent to February 28, 2021, there is no service cost associated with the Plan. A summary of the activity in the Plan’s projected benefit obligation, assets, funded status and amounts recognized in the Company’s consolidated balance sheets is as follows: (In thousands) 2023 2022 Projected benefit obligation: Balance, January 1 $ 85,433 $ 117,323 Interest cost 4,314 3,293 Actuarial gain 865 ( 31,982 ) Benefits paid ( 3,485 ) ( 3,201 ) Balance, December 31 $ 87,127 $ 85,433 Plan assets: Fair value, January 1 $ 83,394 $ 114,136 Actual investment return 8,097 ( 26,820 ) Expenses paid from plan assets ( 1,252 ) ( 721 ) Benefits paid ( 3,485 ) ( 3,201 ) Fair value, December 31 $ 86,754 $ 83,394 Funded status: Accrued pension liability $ ( 373 ) $ ( 2,039 ) The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2023, 2022 and 2021, the Plan’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve. For 2023 and 2022, the Pri-2012 Mortality Table and MP-2021 Mortality Improvement Scale were used. For 2021, the Pri-2012 Mortality Table and MP-2021 Mortality Improvement Scale were used. 61 Table of Contents 2023 2022 2021 Weighted average discount rate 5.05 % 5.25 % 2.85 % Rate of increase in compensation levels N/A N/A (a) (a) 6.0 % graded down to 3.25 % over the first seven years of service. The accumulated benefit obligation was $ 87.1 million and $ 85.4 million as of December 31, 2023 and 2022, respectively. The Company made no contributions during 2023 or 2022 to the Plan. The Company has not determined if it will make a contribution to the Plan in 2024. The following pension benefit payments, as appropriate, are expected to be paid by the Plan: Amount 2024 $ 4,328,000 2025 4,532,000 2026 4,758,000 2027 4,968,000 2028 5,161,000 2029-2033 28,280,000 The Plan’s net periodic pension cost (benefit) included the following components: For the Year Ended December 31, (In thousands) 2023 2022 2021 Service cost – benefits earned during the year $ — $ — $ 1,002 Interest cost on projected benefit obligations 4,314 3,293 3,076 Expected return on plan assets ( 3,735 ) ( 5,857 ) ( 6,310 ) Net amortization and deferral 154 — 393 Net periodic pension cost (benefit) $ 733 $ ( 2,564 ) $ ( 1,839 ) The following represent the major assumptions used to determine the net periodic pension cost (benefit) of the Plan: 2023 2022 2021 Weighted average discount rate 5.25 % 2.85 % 2.55 % Rate of increase in compensation levels N/A N/A (a ) Expected long-term rate of return on assets 6.00 % 6.00 % 6.00 % (a) 6.0 % graded down to 3.25 % over the first seven years of service. For 2023 and 2022, the Pri-2012 Mortality Table and the MP-2021 Mortality Improvement Table were used. For 2021, the Pri-2012 Mortality Table and the MP-2020 Mortality Improvement Table were used. The investment objective for the Plan is to maximize total return with a tolerance for average risk. Asset allocation is a balance between fixed income and equity investments, with a target allocation of approximately 86 % fixed income, and 14 % equity. Due to volatility in the market, this target allocation is not always desirable and asset allocations can fluctuate between acceptable ranges. The fixed income component is invested in pooled investment grade securities. The equity 62 Table of Contents components are invested in pooled large cap, small/mid cap and non-U.S. stocks. The expected one-year nominal returns and annual standard deviations are shown by asset class below: Asset Class % of Total Portfolio One-Year Nominal Return Annual Standard Deviation Core Fixed Income 86.0 % 4.52 % 4.30 % Global Equity 14.0 % 8.54 % 18.12 % Applying appropriate correlation factors between each of the asset classes the long-term rate of return on assets is estimated to be 5.00 %. A summary of the fair value measurements by type of asset is as follows: Fair Value Measurements as of December 31, 2023 2022 (In thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Observable Inputs (Level 2) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Observable Inputs (Level 2) Cash $ 614 $ 614 $ — $ 566 $ 566 $ — Real estate investment trusts 2,849 — 2,849 7,120 — 7,120 Equity securities U.S. Small/Mid Cap Growth 987 — 987 2,055 — 2,055 Non-U. S. Core 3,811 — 3,811 7,822 — 7,822 U.S. Large Cap Passive 3,333 — 3,333 8,319 — 8,319 Emerging Markets 1,391 — 1,391 3,000 — 3,000 Fixed Income U.S. Core 69,710 — 69,710 51,756 — 51,756 Opportunistic 4,059 — 4,059 2,756 — 2,756 Total $ 86,754 $ 614 $ 86,140 $ 83,394 $ 566 $ 82,828 Supplemental Executive Retirement Plan The Company also has an unfunded supplemental executive retirement plan (“SERP”) which covers key executives of the Company whose benefits are limited by the Internal Revenue Service under the Company’s qualified retirement plan. The SERP is a noncontributory plan in which the Company’s subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as the Plan. A summary of the activity in the SERP’s projected benefit obligation and amounts recognized in the Company’s consolidated balance sheets is as follows: December 31, (In thousands) 2023 2022 Benefit obligation: Balance, January 1 $ 9,579 $ 12,420 Interest cost 472 318 Benefits paid ( 400 ) ( 348 ) Actuarial gain ( 150 ) ( 2,811 ) Balance, December 31 $ 9,501 $ 9,579 63 Table of Contents The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2023, 2022 and 2021, the SERP’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve. 2023 2022 2021 Weighted average discount rate 4.95 % 5.15 % 2.65 % Rate of increase in compensation levels N/A N/A (a) (a) 6.00 % graded down to 3.25 % over the first seven years of service. The accumulated benefit obligation was $ 9.5 million and $ 9.6 million as of December 31, 2023 and 2022, respectively. Since this is an unfunded plan, there are no plan assets. Benefits paid were $ 400,000 in 2023, $ 348,000 in 2022, and $ 282,000 in 2021. Expected future benefits payable by the Company over the next ten years are as follows: Amount 2024 $ 792,000 2025 790,000 2026 787,000 2027 783,000 2028 778,000 2029-2033 $ 3,754,000 Net periodic pension cost related to the SERP included the following components: For the Year Ended December 31, (In thousands) 2023 2022 2021 Service cost – benefits earned during the year $ — $ — $ 147 Interest cost on projected benefit obligations 472 318 291 Net amortization and deferral — 108 203 Net periodic pension cost $ 472 $ 426 $ 641 The pretax amounts in accumulated other comprehensive loss as of December 31 were as follows: The Plan SERP (In thousands) 2023 2022 2023 2022 Prior service cost $ — $ — $ — $ — Net actuarial loss (gain) 4,434 6,833 ( 287 ) ( 136 ) Total $ 4,434 $ 6,833 $ ( 287 ) $ ( 136 ) The estimated pretax prior service cost and net actuarial loss (gain) in accumulated other comprehensive loss at December 31, 2023 expected to be recognized as components of net periodic benefit cost in 2024 for both the Plan and SERP is $ 0 . The Company also maintains a noncontributory profit sharing program, which covers most of its employees. Employer contributions are calculated based upon formulas which relate to current operating results and other factors. Profit sharing expense recognized in personnel expense in the consolidated statements of income in 2023, 2022, and 2021 was $ 6.8 million, $ 7.9 million, and $ 6.4 million, respectively. The Company also sponsors a defined contribution 401(k) plan to provide additional retirement benefits to substantially all employees. Contributions under the 401(k) plan for 2023, 2022 and 2021 were $ 5.1 million, $ 4.6 million, and $ 3.5 million, respectively. Note 11 64 Table of Contents Stock-based Compensation Stock-based compensation awards prior to April 17, 2023 were issued under the Company's Amended and Restated Omnibus Stock and Performance Compensation Plan (the "Prior Plan"). On April 18, 2023, shareholders approved the 2023 Omnibus Stock and Performance Compensation Plan (the "2023 Omnibus Plan") to replace the Prior Plan. The 2023 Omnibus Plan permits the issuance of up to 1.0 million shares of the Company’s common stock in the form of stock options, SARs, restricted stock, restricted stock units, phantom stock, and performance awards. Restricted Stock Restricted shares granted to Company employees are amortized to expense over the three-year cliff vesting period. Restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned. Changes in restricted shares outstanding for the year ended December 31, 2023 were as follows: Shares Weighted Average Grant Date Fair Value Balance at December 31, 2022 205,565 $ 42.64 Granted 57,837 44.61 Vested ( 25,224 ) 51.66 Forfeited ( 398 ) 40.15 Balance at December 31, 2023 237,780 $ 42.17 During 2022 and 2021, 64,151 and 53,906 shares, respectively, were granted with weighted average per share market values at date of grant of $ 39.30 in 2022 and $ 41.55 in 2021. The fair value of such shares are based on the market price on the date of grant. Amortization of restricted stock bonus awards totaled $ 2.2 million for 2023, $ 2.4 million for 2022 and $ 1.8 million for 2021. As of December 31, 2023, the total unrecognized compensation expense related to non-vested restricted stock awards was $ 1.5 million, and the related weighted average period over which it is expected to be recognized is approximately 0.99 years. The total fair value of shares vested during the years ended December 2023, 2022, and 2021 was $ 1.3 million, $ 1.1 million, and $ 1.2 million, respectively. Performance-Based Restricted Stock The Company has granted three-year PBRS awards which are contingent upon the Company’s achievement of pre-established financial goals over a three-year cliff vest period. The number of shares issued ranges from 0 % to 150 % of the target opportunity based on the actual achievement of financial goals for the three-year performance period. Following is a summary of the activity of the PBRS, based on 100% of target value, for the year ended December 31, 2023: Shares Weighted Average Grant Date Fair Value Balance at December 31, 2022 138,785 $ 43.19 Granted 51,453 48.19 Vested ( 30,567 ) 54.02 Forfeited ( 598 ) 40.15 Balance at December 31, 2023 159,073 $ 42.74 The PBRS that vested during the year ended December 31, 2023 achieved weighted average financial goals of 86.7 % of target, resulting in the issuance of 26,499 shares of common stock. The PBRS that vested during the year ended December 31, 2022 achieved weighted average financial goals of 52.9 % of target, resulting in the issuance of 18,021 65 Table of Contents shares of common stock. The outstanding PBRS at December 31, 2023 will vest at scheduled vesting dates and the actual number of shares of common stock issued will range from 0 % to 150 % of the target opportunity based on the actual achievement of financial goals for the respective three-year performance period. SARs During 2023, there were no SARs granted and no expense recognized. As of December 31, 2023, there was no unrecognized compensation expense related to SARs. Changes in SARs outstanding for the year ended December 31, 2023 were as follows: SARs Weighted Average Exercise Price Balance at December 31, 2022 46,325 $ 41.62 Exercised ( 15,916 ) 31.92 Balance at December 31, 2023 30,409 46.70 Exercisable at December 31, 2023 30,409 $ 46.70 The total intrinsic value of SARs exercised during 2023 and 2022 was $ 508,000 and $ 2.2 million, respectively. The average remaining contractual term for SARs outstanding as of December 31, 2023 was 0.08 years, and the aggregate intrinsic value was $ 0 . The average remaining contractual term for SARs outstanding as of December 31, 2022 was 0.73 years, and the aggregate intrinsic value was $ 192,000 . The total compensation cost for share-based payment arrangements was $ 4.1 million, $ 6.7 million, and $ 2.9 million in 2023, 2022, and 2021, respectively. Note 12 Other Operating Expense Details of other operating expense are as follows: For the Years Ended December 31, (In thousands) 2023 2022 2021 Promotional expense $ 3,252 $ 2,889 $ 2,627 Outside service fees 9,627 7,874 7,413 Data processing services 6,553 3,365 2,650 Other 10,551 7,950 4,053 Total other operating expense $ 29,983 $ 22,078 $ 16,743 66 Table of Contents Note 13 Income Taxes The components of income tax expense (benefit) are as follows: For the Years Ended December 31, (In thousands) 2023 2022 2021 Current: Federal $ 6,378 $ 7,794 $ 5,018 State 1,203 1,365 897 Deferred: Federal ( 242 ) ( 990 ) ( 608 ) State ( 42 ) ( 173 ) ( 90 ) Total income tax expense $ 7,297 $ 7,996 $ 5,217 A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 21% for each year to income before income tax expense is as follows: For the Years Ended December 31, (In thousands) 2023 2022 2021 Expected income tax expense $ 7,885 $ 9,035 $ 7,103 (Reductions) increases resulting from: Tax-exempt income ( 1,104 ) ( 1,571 ) ( 1,673 ) State taxes, net of federal benefit 917 942 638 Share-based compensation adjustment 298 258 92 Federal tax credits ( 643 ) ( 473 ) ( 357 ) Other, net ( 56 ) ( 195 ) ( 586 ) Total income tax expense $ 7,297 $ 7,996 $ 5,217 Income tax expense in 2023 totaled $ 7.3 million compared to $ 8.0 million in 2022 and $ 5.2 million in 2021. When measured as a percent of pre-tax income, the Company’s effective tax rate was 19.5 % in 2023, 18.6 % in 2022, and 15.4 % in 2021. 67 Table of Contents The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: December 31, (In thousands) 2023 2022 Deferred tax assets: Allowance for credit losses $ 3,115 $ 3,222 ASC 715 pension funding liability 987 1,594 Supplemental executive retirement plan accrual 2,328 2,311 Stock compensation 2,988 2,745 Unrealized loss on investment securities available-for-sale (1) 13,756 16,798 Research and development expenses 604 772 Lease liability 2,020 2,261 Other 330 640 Total deferred tax assets $ 26,128 $ 30,343 Deferred tax liabilities: Premises and equipment $ ( 1,144 ) $ ( 1,710 ) Pension ( 967 ) ( 1,141 ) Intangible assets ( 1,828 ) ( 1,744 ) Right of use asset ( 1,927 ) ( 2,178 ) Prepaid expenses ( 765 ) ( 847 ) Other ( 283 ) ( 144 ) Total deferred tax liabilities $ ( 6,914 ) $ ( 7,764 ) Net deferred tax assets $ 19,214 $ 22,579 (1) The deferred tax asset associated with the unrealized losses on securities is mainly a result of changes in interest rates, and the unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. The issuers of the securities are of high credit quality and all principal amounts are expected to be paid when the securities mature. The Company does not intend to sell and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recovery. A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance at December 31, 2023 or 2022, due to management’s belief that it is more likely than not that the deferred tax asset is realizable. The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table: (In thousands) 2023 2022 2021 Balance at January 1 $ 1,252 $ 1,405 $ 1,231 Changes in unrecognized tax benefits as a result of tax positions taken during a prior year 99 ( 176 ) 165 Changes in unrecognized tax benefits as a result of tax position taken during the current year 300 222 239 Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations ( 254 ) ( 199 ) ( 230 ) Balance at December 31 $ 1,397 $ 1,252 $ 1,405 At December 31, 2023, 2022 and 2021, the balances of the Company’s unrecognized tax benefits which would, if recognized, affect the Company’s effective tax rate were $ 1,285,000 , $ 1,129,000 and $ 1,134,000 , respectively. These amounts are net of the offsetting expense from other taxing jurisdictions. 68 Table of Contents As of December 31, 2023, 2022 and 2021, the Company had $ 117,000 , $ 84,000 and $ 85,000 , respectively, in accrued interest related to unrecognized tax benefits. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease by approximately $ 285,000 over the next 12 months. The reduction primarily relates to the anticipated lapse in the statute of limitations. The unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax jurisdictions. The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction. The Company’s federal income tax returns for tax years 2020, 2021 and 2022 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2019 through 2022. Note 14 Disclosures about Fair Value of Financial Instruments Following is a summary of the carrying amounts and fair values of the Company’s financial instruments: December 31, 2023 2022 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value Balance sheet assets: Cash and cash equivalents $ 372,468 $ 372,468 $ 200,942 $ 200,942 Investment securities 627,117 627,117 754,468 754,468 Loans, net 1,001,229 962,223 1,069,367 1,004,682 Accrued interest receivable 8,450 8,450 8,297 8,297 Total $ 2,009,264 $ 1,970,258 $ 2,033,074 $ 1,968,389 Balance sheet liabilities: Deposits $ 1,140,814 $ 1,140,814 $ 1,257,217 $ 1,257,217 Accounts and drafts payable 1,071,369 1,071,369 1,067,600 1,067,600 Accrued interest payable 635 635 66 66 Total $ 2,212,818 $ 2,212,818 $ 2,324,883 $ 2,324,883 The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents The carrying amount approximates fair value. Investment Securities The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 3 - Investment Securities, for fair value and unrealized gains and losses by investment type. Loans The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for credit losses approximates a fair valuation. Accrued Interest Receivable The carrying amount approximates fair value. Deposits The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits. 69 Table of Contents Accounts and Drafts Payable The carrying amount approximates fair value. Accrued Interest The carrying amount approximates fair value. Limitations Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets or liabilities that are not considered financial assets or liabilities include premises and equipment and the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market (core deposit intangible). In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Note 15 Commitments and Contingencies The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. At December 31, 2023, an allowance for unfunded commitments of $ 132,000 had been recorded, as compared to $ 232,000 at December 31, 2022. See Note 1 "Summary of Significant Accounting Policies" for information related to CECL. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The approximate remaining terms of commercial and standby letters of credit range from less than one to five years . Since these financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments. The following table shows commitments to extend credit, standby letters of credit and commercial letters: December 31, (In thousands) 2023 2022 Commitments to extend credit $ 196,064 $ 237,006 Standby letters of credit 13,614 14,494 Commercial letters of credit 353 354 The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present credit worthiness of such counterparties. The Company believes such commitments have been made at terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon. The Company and its subsidiaries are not involved in any pending proceedings other than ordinary routine litigation incidental to their businesses. Management believes none of these proceedings, if determined adversely, would have a material effect on the business or financial condition of the Company or its subsidiaries. 70 Table of Contents Note 16 Revenue from Contracts with Customers Revenue is recognized as the obligation to the customer is satisfied. The following is detail of the Company’s revenue from contracts with clients. Processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components. Financial fees – The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components. Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction-based fees that are recognized at the point in time when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components. The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope for the years ended December 31, 2023, 2022 and 2021. For the Years Ended December 31, (In thousands) 2023 2022 2021 Fee revenue and other income In-scope of ASC 606 Processing fees $ 79,566 $ 76,470 $ 74,589 Financial fees 45,985 43,757 32,733 Information services payment and processing revenue 125,551 120,227 107,322 Bank service fees 1,063 1,430 1,369 Fee revenue (in-scope of ASC 606) 126,614 121,657 108,691 Other income (out-of-scope of ASC 606) 3,853 3,325 1,000 Total fee revenue and other income $ 130,467 $ 124,982 $ 109,691 Note 17 Industry Segment Information The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service and processing requirements. The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations. In addition, this segment provides church management software and on-line generosity services primarily for faith-based ministries. The Banking Services segment provides banking services primarily to privately held businesses, franchise restaurants and faith-based ministries, as well as supporting the banking needs of the Information Services segment. The Company’s accounting policies for segments are the same as those described in Note 1 of this report. Management evaluates segment performance based on pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value. Substantially all revenue originates from, and all long-lived assets are located within the United States, and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue. 71 Table of Contents Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Banking Services interest income is determined by actual interest income on loans minus actual interest expense paid on deposits plus/minus an allocation for interest income or expense dependent on the remaining available liquidity of the segment. Information Services interest income is determined by multiplying available liquidity by actual yields on short-term investments and investment securities. Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other. Summarized information about the Company’s operations in each industry segment for the years ended December 31, 2023, 2022 and 2021 is as follows: (In thousands) Information Services Banking Services Corporate, Eliminations and Other Total 2023 Fee income $ 126,766 $ 2,713 $ 988 $ 130,467 Interest income 39,899 54,696 ( 11,835 ) 82,760 Interest expense 1,191 28,029 ( 12,954 ) 16,266 Intersegment income (expense) ( 4,270 ) 4,270 — — Pre-tax income 23,662 11,587 2,107 37,356 Goodwill 17,173 136 — 17,309 Other intangible assets, net 3,345 — — 3,345 Total assets 1,586,388 1,103,173 ( 210,939 ) 2,478,622 Average funding sources $ 1,353,499 $ 810,903 $ — $ 2,164,402 2022 Fee income $ 120,234 $ 3,606 $ 1,142 $ 124,982 Interest income 28,528 40,913 ( 7,115 ) 62,326 Interest expense 166 4,143 ( 827 ) 3,482 Intersegment income (expense) ( 3,350 ) 3,350 — — Pre-tax income 26,478 21,566 ( 5,144 ) 42,900 Goodwill 17,173 136 — 17,309 Other intangible assets, net 4,126 — — 4,126 Total assets 1,595,939 1,182,439 ( 205,355 ) 2,573,023 Average funding sources $ 1,379,355 $ 953,346 $ — $ 2,332,701 2021 Fee income $ 106,678 $ 1,405 $ 1,608 $ 109,691 Interest income 24,332 24,732 ( 3,567 ) 45,497 Interest expense — 1,171 — 1,171 Intersegment income (expense) ( 3,222 ) 3,222 — — Pre-tax income 25,446 11,004 ( 2,629 ) 33,821 Goodwill 14,126 136 — 14,262 Other intangible assets, net 2,564 — — 2,564 Total assets 1,450,594 1,090,626 13,681 2,554,901 Average funding sources $ 1,150,493 $ 876,018 $ — $ 2,026,511 72 Table of Contents Note 18 Leases The Company leases certain premises under operating leases. As of December 31, 2023, the Company had lease liabilities of $ 8.5 million and right-of-use assets of $ 8.1 million. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets , respectively. Included in occupancy expense on the consolidated statements of income for 2023 was operating lease cost of $ 1.4 million, short-term lease cost of $ 278,000 , and there was no variable lease cost. The Company paid cash of $ 1.3 million for operating lease amounts included in the measurement of lease liabilities for the year ended December 31, 2023. No right-of-use assets were obtained in exchange for lease liabilities during the year ended December 31, 2023. For the year ended December 31, 2023, the weighted average remaining lease term for the operating leases was 7.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.57 %. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. A maturity analysis of operating lease liabilities and undiscounted cash flows as of December 31, 2023 is as follows: (In thousands) December 31, 2023 Lease payments due Less than 1 year $ 1,327 1-2 years 1,345 2-3 years 1,351 3-4 years 1,357 4-5 years 1,315 Over 5 years 2,904 Total undiscounted cash flows 9,599 Discount on cash flows 1,122 Total lease liability $ 8,477 There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the year ended December 31, 2023. At December 31, 2023, the Company did not have any leases that had not yet commenced. Note 19 Subsequent Events In accordance with FASB ASC 855, Subsequent Events , the Company has evaluated subsequent events after the consolidated balance sheet date of December 31, 2023, and there were no events identified that would require additional disclosures to prevent the Company’s consolidated financial statements from being misleading. 73 Table of Contents Note 20 Condensed Financial Information of Parent Company Following are the condensed balance sheets of the Company (parent company only) and the related condensed statements of income and cash flows. Condensed Balance Sheets December 31, (In thousands) 2023 2022 Assets Cash and due from banks $ 17,003 $ 5,081 Short-term investments 186,169 26,834 Securities available-for-sale, at fair value 399,339 490,829 Loans, net 70,833 74,810 Payments in advance of funding 198,861 293,775 Investments in subsidiaries 188,304 164,907 Premises and equipment, net 29,765 19,525 Investments in bank-owned life insurance 49,159 47,998 Goodwill 17,172 17,172 Other intangible assets, net 3,346 4,126 Accounts and drafts receivable from customers 110,651 95,779 Other assets 51,180 50,331 Total assets $ 1,321,782 $ 1,291,167 Liabilities and Shareholders’ Equity Liabilities: Accounts and drafts payable $ 1,069,338 $ 1,057,463 Other liabilities 22,635 27,379 Total liabilities 1,091,973 1,084,842 Total shareholders’ equity 229,809 206,325 Total liabilities and shareholders’ equity $ 1,321,782 $ 1,291,167 74 Table of Contents Condensed Statements of Income For the Years Ended December 31, (In thousands) 2023 2022 2021 Equity in undistributed income of subsidiaries $ 19,281 $ 10,618 $ 2,252 Dividends received from subsidiaries 7,500 15,000 15,000 Income from subsidiaries – management fees 4,230 4,315 3,115 Processing fees 77,219 74,382 72,579 Financial fees 44,436 42,243 31,847 Other fees 3,804 2,606 970 Net interest income after provision for (release of) credit losses 19,287 13,435 11,316 Total revenue 175,757 162,599 137,079 Expenses: Salaries and employee benefits 105,114 94,047 80,434 Other expenses 40,440 32,406 27,406 Total expenses 145,554 126,453 107,840 Income before income tax expense 30,203 36,146 29,239 Income tax expense 144 1,242 635 Net income $ 30,059 $ 34,904 $ 28,604 75 Table of Contents Condensed Statements of Cash Flows For the Years Ended December 31, (In thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 30,059 $ 34,904 $ 28,604 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries ( 19,281 ) ( 10,618 ) ( 2,252 ) Net change in other assets ( 4,427 ) ( 4,640 ) ( 212 ) Net change in other liabilities ( 2,870 ) 6,462 ( 9,307 ) Stock-based compensation expense 4,139 6,732 2,859 Other, net 10,149 10,412 5,921 Net cash provided by operating activities 17,769 43,252 25,613 Cash flows from investing activities: Proceeds from sales of securities available-for-sale 86,722 3,838 63,774 Proceeds from maturities of securities available-for-sale 23,032 44,566 95,787 Purchases of securities available-for-sale ( 15,332 ) ( 45,340 ) ( 385,651 ) Net decrease (increase) in loans 3,977 ( 34,295 ) 8,799 Net decrease (increase) in payments in advance of funding 94,914 ( 2,347 ) ( 96,864 ) Purchase of bank-owned life insurance — ( 4,000 ) ( 25,119 ) Purchases of premises and equipment, net ( 14,262 ) ( 5,851 ) ( 2,233 ) Asset acquisition of TouchPoint — ( 4,814 ) — Net cash provided by (used in) investing activities 179,051 ( 48,243 ) ( 341,507 ) Cash flows from financing activities: Net (increase) decrease in accounts and drafts receivable from customers ( 14,872 ) ( 90,787 ) 6 Net increase in accounts and drafts payable 11,875 16,393 208,650 Cash dividends paid ( 15,959 ) ( 15,442 ) ( 15,446 ) Purchase of common shares for treasury ( 5,773 ) ( 5,299 ) ( 30,997 ) Other financing activities, net ( 834 ) ( 594 ) ( 850 ) Net cash (used in) provided by financing activities ( 25,563 ) ( 95,729 ) 161,363 Net increase (decrease) in cash and cash equivalents 171,257 ( 100,720 ) ( 154,531 ) Cash and cash equivalents at beginning of year 31,915 132,635 287,166 Cash and cash equivalents at end of year $ 203,172 $ 31,915 $ 132,635 76 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cass Information Systems, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and shareholders’ equity for each of the years in the three‑year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the qualitative risk factors related to the allowance for credit losses on loans evaluated on a collective basis As discussed in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses as of December 31, 2023 was $13.1 million, of which $13.1 million was related to the allowance for credit losses on loans evaluated on a collective basis (the “collective ACL”). The December 31, 2023 collective ACL includes the measure of expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. The Company estimated the collective ACL using a weighted-average remaining maturity (“WARM”) model that utilizes expected annual remaining loan balance, historical loss rates, a reasonable and supportable forecast, and reversion adjustments. Additionally, the collective ACL includes subjective qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. 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 collective ACL. These qualitative risk 77 Table of Contents factors may increase or reduce reserve levels and include adjustments for assumptions related to loan concentrations, lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, value of underlying collateral, and loan portfolio growth. We identified the assessment of the qualitative risk factors related to the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the qualitative risk factors related to the collective ACL methodology, including the conceptual soundness and performance of the qualitative framework. The assessment also included the evaluation of qualitative risk factors and the related assumptions. These qualitative risk factors and related assumptions are sensitive to variation, such that minor changes in the assumption can cause significant changes in the estimates. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the qualitative risk factors related to the collective ACL estimate, including controls over the: • development of the collective ACL methodology • identification and determination of the assumptions used in the qualitative framework • continued use and appropriateness of changes made to the qualitative framework • analysis of the collective ACL results, trends, and ratios We evaluated the Company’s process to develop the qualitative risk factors related to the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles • evaluating judgments made by the Company relative to the assessment of the qualitative framework by comparing it to relevant Company-specific metrics and trends and the applicable industry and regulatory practices • evaluating the qualitative framework used to develop the qualitative risk factors and the effect of those factors on the collective ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models. /s/ KPMG LLP We have served as the Company’s auditor since 1983. St. Louis, Missouri February 28, 2024 78 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.