What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-02-26 · 558 added, 483 removed, 745 unchanged (58% of the section changed)

5 unchanged sentences

Cash and due from banks $ 12,301 $ 30,985

Interest-bearing deposits in other financial institutions

Federal funds sold and other short-term investments

Short-term investments 502,627 639,543

Cash and cash equivalents 514,928 670,528

Securities available-for-sale, at fair value 673,453 357,726

Less allowance for credit/loan losses

Loans 960,567 891,676

Less allowance for credit losses 12,041 11,944

Loans, net 948,526 879,732

Payments in advance of funding 291,427 194,563

1 unchanged sentence

Investments in bank-owned life insurance 43,176 18,058

Goodwill 14,262 14,262

Other intangible assets, net 2,564 3,423

Liabilities and Shareholders’

Other assets 48,452 46,886

Total assets $ 2,554,901 $ 2,203,235

Liabilities and Shareholders’ Equity

Noninterest-bearing $ 582,642 $ 493,504

2 unchanged sentences

Accounts and drafts payable 1,050,396 835,386

Short-term borrowings

Other liabilities 37,204 55,833

Total liabilities 2,309,103 1,942,075

Shareholders’

Preferred stock, par value $.

50 per share;

Shareholders’ Equity:

Preferred stock, par value $ .50 per share;

2,000,000 shares authorized and no shares issued

Common stock, par value $.

50 per share;

40,000,000 shares authorized, 15,505,772 shares issued at December 31, 2020 and 2019.

Common stock, par value $ .50 per share;

40,000,000 shares authorized;

15,505,772 shares issued at December 31, 2021 and 2020;

13,734,295 and 14,392,669 shares outstanding at December 31, 2021 and 2020, respectively.

Additional paid-in capital 204,276 204,875

1 unchanged sentence

Common shares in treasury, at cost ( 1,771,477 and 1,113,103 shares at December 31, 2021 and 2020, respectively)

Accumulated other comprehensive loss

Total shareholders’

Total liabilities and shareholders’

( 78,904 ) ( 50,515 )

Accumulated other comprehensive income (loss) 453 ( 15 )

Total shareholders’ equity 245,798 261,160

Total liabilities and shareholders’ equity $ 2,554,901 $ 2,203,235

See accompanying notes to consolidated financial statements.

7 unchanged sentences

Bank service fees 2,239 1,704 1,386

Gains (losses) on sales of securities

Gains on sales of securities 51 1,075 19

Other 946 458 711

Total fee revenue and other income 109,691 100,441 110,069

2 unchanged sentences

Interest and dividends on securities:

Taxable 2,547 1,692 2,497

Exempt from federal income taxes 7,046 7,104 7,839

6 unchanged sentences

Net interest income 44,326 45,325 47,416

Provision for credit/loan losses

Net interest income after provision for credit/loan losses

(Release of) provision for credit losses ( 130 ) 810 250

Net interest income after (release of) provision for credit losses 44,456 44,515 47,166

Total net revenue 154,147 144,956 157,235

Operating Expense:

Personnel 92,155 88,062 91,083

Occupancy 3,824 3,739 3,918

Equipment 6,745 6,568 6,140

Amortization of intangible assets 859 859 563

3 unchanged sentences

Income tax expense 5,217 5,165 7,062

Net income $ 28,604 $ 25,176 $ 30,404

Basic Earnings Per Share $ 2.03 $ 1.75 $ 2.11

7 unchanged sentences

Comprehensive Income:

Net income $ 28,604 $ 25,176 $ 30,404

Other comprehensive income (loss):

Net unrealized gain (loss) on securities available-for-sale

Reclassification adjustments for (gains) losses included in net income

Net unrealized (loss) gain on securities available-for-sale ( 10,447 ) 6,689 13,429

Tax effect 2,487 ( 1,592 ) ( 3,196 )

Reclassification adjustments for gains included in net income ( 51 ) ( 1,075 ) ( 19 )

Tax effect 12 256 5

FASB ASC 715 pension adjustment 11,363 12,548 ( 6,903 )

Tax effect ( 2,705 ) ( 2,987 ) 1,643

Foreign currency translation adjustments ( 191 ) 66 ( 7 )

Other comprehensive income (loss)

Other comprehensive income 468 13,905 4,952

Total comprehensive income $ 29,072 $ 39,081 $ 35,356

6 unchanged sentences

Cash Flows From Operating Activities:

Net income $ 28,604 $ 25,176 $ 30,404

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Net (gains) losses on sales of securities

Amortization of intangible assets 859 859 563

Net amortization of premium/discount on investment securities 7,328 5,939 6,149

Depreciation 4,313 4,471 4,227

Gains on sales of securities ( 51 ) ( 1,075 ) ( 19 )

Stock-based compensation expense 2,859 2,267 3,144

Provision for credit/loan losses

(Release of) provision for credit losses ( 130 ) 810 250

Deferred income tax (benefit) expense ( 698 ) ( 874 ) 1,247

Increase (decrease) in current income tax liability 206 1,237 ( 1,838 )

Increase (decrease) in pension liability

Decrease in accounts receivable

(Decrease) increase in pension liability ( 1,811 ) 4,423 ( 1,916 )

(Increase) decrease in accounts receivable ( 602 ) 756 988

Other operating activities, net ( 6,330 ) 3,792 ( 1,073 )

3 unchanged sentences

Proceeds from maturities of securities available-for-sale 96,951 63,789 21,502

Purchase of securities available-for-sale

Purchases of securities available-for-sale ( 494,226 ) ( 20,043 ) —

Net increase in loans ( 68,664 ) ( 119,183 ) ( 50,970 )

Decrease (increase) in payments in advance of funding

Purchase of bank-owned life insurance ( 25,119 ) — —

(Increase) decrease in payments in advance of funding ( 96,864 ) 11,595 ( 45,381 )

Purchases of premises and equipment, net ( 4,369 ) ( 2,001 ) ( 2,723 )

4 unchanged sentences

Net increase (decrease) in interest-bearing demand and savings deposits 90,310 166,289 ( 1,133 )

Net (decrease) increase in time deposits

Net decrease in time deposits ( 8,801 ) ( 14,982 ) ( 1,490 )

Net increase (decrease) in accounts and drafts payable 215,016 210,495 ( 22,400 )

4 unchanged sentences

Net cash provided by financing activities 338,370 462,693 6,652

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents ( 155,600 ) 466,574 ( 26,979 )

Cash and cash equivalents at beginning of year 670,528 203,954 230,933

6 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

(In thousands except per share data)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except per share data) Common

Stock Additional

Capital Retained

Earnings Treasury

Stock Accumulated

Comprehensive

Income (Loss)

Income (Loss) Total

Balance, December 31, 2018

Cash dividends ($.

89 per share)

Stock dividend

$ 7,753 $ 205,770 $ 75,171 $ ( 39,974 ) $ ( 18,872 ) $ 229,848

Net income 30,404 30,404

Cash dividends ($ 1.05 per share)

( 15,234 ) ( 15,234 )

Issuance of 34,810 common shares pursuant to stock-based compensation plan, net

( 1,417 ) 1,358 ( 59 )

Exercise of SARs ( 2,100 ) 1,034 ( 1,066 )

1 unchanged sentence

Purchase of 154,593 common shares

( 7,799 ) ( 7,799 )

Other comprehensive loss 4,952 4,952

Balance, December 31, 2019

$ 7,753 $ 205,397 $ 90,341 $ ( 45,381 ) $ ( 13,920 ) $ 244,190

Cumulative effect of accounting change (ASU 2016-13), net of tax ( 856 ) ( 856 )

Balance, January 1, 2020 $ 7,753 $ 205,397 $ 89,485 $ ( 45,381 ) $ ( 13,920 ) $ 243,334

Net income 25,176 25,176

Cash dividends ($ 1.08 per share)

( 15,599 ) ( 15,599 )

Issuance of 72,448 common shares pursuant to stock-based compensation plan, net

( 2,546 ) 1,550 ( 996 )

Exercise of SARs ( 243 ) 141 ( 102 )

1 unchanged sentence

Purchase of 162,901 common shares

( 6,825 ) ( 6,825 )

Other comprehensive income 13,905 13,905

Balance, December 31, 2020

Cumulative effect of accounting change (ASU 2016-13), net of tax

Balance, January 1, 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 )

1 unchanged sentence

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

See accompanying notes to consolidated financial statements.

3 unchanged sentences

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 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.

2 unchanged sentences

Certain amounts in the 2020 and 2019 consolidated financial statements have been reclassified to conform to the 2021 presentation.

Such reclassifications have no effect on previously reported net income or shareholders’

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, federal funds sold and other short-term investments as segregated in the accompanying consolidated balance sheets to be cash equivalents.

Investment in Debt Securities The Company classifies its debt marketable securities as available-for-sale.

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’

Securities are periodically evaluated for credit losses in accordance with the guidance provided in FASB ASC Topic 326, Financial Instruments –

Credit Losses .

For available for sale debt 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 likely that it will be required to sell the security before the anticipated recovery.

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 .

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 likely 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.

5 unchanged sentences

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.

Prior to the adoption of ASU 2016 -13 as of January 1, 2020, the Company evaluated a decline in the fair value of any available-for-sale security below cost to determine whether the decline was deemed other than temporary and, if so, would result in a charge to earnings and the establishment of a new cost basis for the security.

To determine whether impairment was other than temporary, the Company considered guidance provided in the FASB ASC Topic 320, Investments –

Debt and Equity Securities.

Prior to the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") as of January 1, 2020, the Company evaluated a decline in the fair value of any available-for-sale security below cost to determine whether the decline was deemed other than temporary and, if so, would result in a charge to earnings and the establishment of a new cost basis for the security.

To determine whether impairment was other than temporary, the Company considered guidance provided in the FASB ASC Topic 320, Investments – Debt and Equity Securities .

When determining whether a debt security was other-than-temporarily impaired, the Company assessed whether it had the intent to sell the security and whether it was more likely than not that the Company would be required to sell prior to recovery of the amortized cost basis.

Evidence considered in this assessment included the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee.

Premiums and discounts are amortized or accreted to interest income over the estimated lives of the securities using the level-yield method.

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.

1 unchanged sentence

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.

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.

1 unchanged sentence

Management utilizes a systematic, documented approach in determining the appropriate level of the ACL.

Management’s approach provides for estimated credit losses on loans in accordance with ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

Management’s approach provides for estimated current expected credit losses on loans in accordance with ASU 2016-13.

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.

4 unchanged sentences

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 lending management experience, asset quality trends, borrower’s ability to pay, collateral, and other environmental factors.

Adjustments to historical loss information are made for lending management experience, 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.

The ACL is measured on a collective pool basis when similar risk characteristics exist.

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.

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.

3 unchanged sentences

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 (“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 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.

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 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.

The ACL is calculated as the difference between the amortized cost basis 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, beyond the reasonable and supportable forecast period, loss rates are reverted immediately to the Company’s long-run historical averages, as this represents a unique loan segment to the peer portfolios.

The economic forecast is based on management’s assessment of the length and pattern of the current economic 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, 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.

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.

1 unchanged sentence

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.

Prior to the adoption of ASU 2016-13 as of January 1, 2020, the Company determined reserves for losses on the loan portfolio in the allowance for loan losses ("ALLL").

The ALLL was increased by provisions charged to expense and was available to absorb charge-offs, net of recoveries.

Management utilized a systematic, documented approach in determining the appropriate level of the ALLL.

Management’s approach provided for estimated credit losses on individually evaluated loans in accordance with FASB ASC 310, Allowance for Credit Losses (“ASC 310”).

These estimates were based upon a number of factors, such as payment history, financial condition of the borrower, expected future cash flows and discounted collateral exposure.

Unfunded loan commitments

6 unchanged sentences

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 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 are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss.

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.

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.

1 unchanged sentence

Credit losses are not estimated for AIR from investment securities as interest deemed uncollectible is written off through interest income.

Allowance for Loan Losses Prior to the adoption of ASU 2016-13 as of January 1, 2020, the Company determined reserves for losses on the loan portfolio in the ALLL.

The ALLL was increased by provisions charged to expense and was available to absorb charge-offs, net of recoveries.

Management utilized a systematic, documented approach in determining the appropriate level of the ALLL.

Management’s approach provided for estimated credit losses on individually evaluated loans in accordance with FASB ASC 310, Allowance for Credit Losses (“ASC 310”).

These estimates were based upon a number of factors, such as payment history, financial condition of the borrower, expected future cash flows and discounted collateral exposure.

Estimated credit losses inherent in the remainder of the portfolio were estimated in accordance with FASB ASC 450, Contingencies.

These loans were segmented into groups based on similar risk characteristics.

Historical loss rates for each risk group, which were updated quarterly, were generally quantified using all recorded loan charge-offs and recoveries over a prescribed look-back period.

These historical loss rates for each risk group were used as the starting point to determine the level of the allowance.

The Company’s methodology incorporated an estimated loss emergence period for each risk group.

The loss emergence period was the period of time from when a borrower experienced a loss event and when the actual loss was recognized in the financial statements, generally at the time of initial charge-off of the loan balance.

The Company’s methodology also included qualitative risk factors that allowed management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that was based on historical loss rates.

Such risk factors were generally reviewed and updated quarterly, as appropriate, and were adjusted to reflect changes in national and local economic conditions and developments, the volume and severity of delinquent and internally classified loans, loan concentrations, assessment of trends in collateral values, assessment of changes in borrowers’

financial stability, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

Management believed the ALLL was adequate to absorb probable losses in the loan portfolio.

Additionally, various regulatory agencies, as an integral part of their examination process, periodically reviewed the Company’s ALLL.

Such agencies may have required the Company to increase the ALLL based on information available to them at the time of their examinations.

Impairment of Loans A loan is considered impaired 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.

When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate.

Alternatively, impairment could be measured by reference to an observable market price, 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 impairment based on the fair value of the collateral when the Company determines foreclosure is probable.

Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement.

The Company uses its nonaccrual methods as discussed above for recognizing interest on impaired loans.

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.

Additionally, troubled debt restructurings are measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement.

The Company uses its methods as discussed above for recognizing interest on individually evaluated loans.

Foreclosed Assets Real estate acquired as a result of foreclosure is initially recorded at fair value less estimated selling costs.

14 unchanged sentences

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.

Information Services Revenue A majority of the Company’s revenues are attributable to fees for providing services.

These services include transportation invoice rating, payment processing, auditing, and the generation of accounting and transportation information.

Information Services Revenue A majority of the Company’s revenues are attributable to fees for 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.

6 unchanged sentences

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.

Company and its subsidiaries file U.S.

The Company and its subsidiaries file U.S.

federal and certain state income tax returns on a consolidated basis.

7 unchanged sentences

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.

2 unchanged sentences

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 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.

7 unchanged sentences

The Company records securities available for sale at their fair values on a recurring basis using Level 2 valuations.

Additionally, the Company records impaired loans and other real estate owned at their fair value on a nonrecurring basis.

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 June 2016, the FASB issued ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

The standard is effective for fiscal periods beginning after December 15, 2019.

In June 2016, the FASB issued ASU 2016-13, .

The standard was effective for fiscal periods beginning after December 15, 2019.

The CARES Act was signed into law on March 27, 2020 and included provisions that temporarily delayed the required implementation date of ASU 2016-13 to the earlier of the end of the national pandemic or December 31, 2020.

The CAA was signed into law on December 27, 2020 and extended the deferral of required implementation of ASU 2016-13 to the earlier of the first day of a company’s fiscal year that begins after the date the COVID-19 national emergency comes to an end or January 1, 2022.

The Consolidated Appropriations Act was signed into law on December 27, 2020 and extended the deferral of required implementation of ASU 2016-13 to the earlier of the first day of a company’s fiscal year that begins after the date the COVID-19 national emergency comes to an end or January 1, 2022.

The Company elected to defer the adoption of ASU 2016-13 until December 31, 2020 with an effective date of January 1, 2020.

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The Company adopted ASU 2016-13 using a modified retrospective approach.

Results for annual reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with

previously applicable GAAP.

Results for annual reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Upon adoption, the Company recognized increases of $ 723,000 in the allowance for credit losses and $ 402,000 in the reserve for unfunded commitments, with a corresponding reduction to retained earnings, net of tax, of $ 856,000 .

No credit loss allowance was required upon adoption for the investment securities portfolio.

Consistent with the provisions of the CARES Act, results for quarterly reporting periods beginning after December 31, 2020 in the Company’s Form 10-Q will be presented under ASU 2016-13 while prior quarterly period amounts continue to be reported in accordance with previously applicable GAAP.

No allowance for credit loss was required upon adoption for the investment securities portfolio.

Consistent with the provisions of the CARES Act, results for quarterly reporting periods beginning after December 31, 2020 in the Company’s Form 10-Q are presented under ASU 2016-13 while prior quarterly period amounts continue to be reported in accordance with previously applicable GAAP.

The following table illustrates the impact of the adoption of ASU 2016-13:

(In thousands)

December 31, 2019

Impact of ASU 2016-13 Adoption

As Reported Under ASU 2016-13

(In thousands) December 31, 2019 Impact of ASU 2016-13 Adoption As Reported Under ASU 2016-13

Allowance for loan/credit losses on loans $ 10,556 $ 723 $ 11,279

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Reserve for unfunded commitments — 402 402

Shareholders’

Shareholders’ equity:

Retained earnings 90,341 ( 856 ) 89,485

Risks and Uncertainties

On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world.

The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

This response to the COVID-19 pandemic has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

In late fiscal 2020, vaccines for combatting COVID-19 were approved by health agencies and began to be administered.

However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to front-line health care workers and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19.

The timeline of full administration of the COVID-19 vaccines is uncertain and fluctuating, but is widely thought to be unlikely to occur in most jurisdictions until mid to late 2021.

The impact of COVID-19, including the impact of restrictions imposed to combat its spread, could result in additional and prolonged business closures, work restrictions and activity restrictions.

The Company has evaluated subsequent events after the consolidated balance sheet date of December 31, 2020 and the breadth of the impact of the global presence of COVID-19 on the Company’s business is currently unknown.

The Company is closely monitoring developments related to COVID-19 checking regularly for updated information and recommendations from the WHO and the CDC, from national, state, and local governments, and evaluating courses of action being taken by peers.

The duration and severity of the effect of COVID-19 on economic, market and business conditions and the timeline and shape of recovery from the pandemic remain uncertain.

On March 11, 2020, the WHO declared the outbreak of COVID-19 as a global pandemic.

The declaration of a global pandemic meant that almost all public commerce and related business activities was, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

In late fiscal 2020, vaccines for combating COVID-19 were approved by health agencies and have been administered throughout the country.

Although vaccination efforts have been widespread and continuing, and a significant amount of previous business and other restrictions have been lifted, the continued impact of COVID-19, including any increases in the infection rates, new variants, and renewed governmental action to slow the spread of COVID-19, cannot be estimated.

The ongoing impact of COVID-19, including the impact of restrictions imposed to combat its spread, could result in additional and prolonged business closures, supply chain disruptions, work restrictions and activity restrictions.

The Company is closely monitoring developments related to COVID-19, checking regularly for updated information and recommendations from the WHO and the CDC, from national, state, and local governments, and evaluating courses of

action being taken by peers.

At this time, the Company remains subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic, including, but not limited to, those discussed below, which may have an adverse effect on business, financial condition and results of operations.

Financial position and results of operations - The global health crisis caused by COVID-19 has and will continue to negatively impact business activity throughout the world.

The COVID-19 outbreak and associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty, have had, and continue to have, an adverse impact on the Company’s financial results and are discussed in more detail below.

Although in various locations certain activity restrictions have been relaxed with some success, many states and localities are experiencing significant increases in the number of COVID-19 cases, prompting a reinstatement of prior activity restrictions in some locations and the need for additional aid and other forms of relief for affected individuals, businesses and other entities.

The COVID-19 outbreak and associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty and shortages in the labor force, have had, and continue to have, an adverse impact on the Company’s financial results and are discussed in more detail below.

Although many restrictions have been relaxed with some success and economic conditions have been improving, many states and localities are still experiencing moderate to high levels of COVID-19 cases, prompting continued restrictions and the need for additional aid and other forms of relief for affected individuals, businesses and other entities.

When and if COVID-19 is demonstrably contained, the Company anticipates a rebound in economic activity;

however, any such rebound is contingent upon the rate and effectiveness of the containment efforts deployed by federal, state, and local governments.

In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that have occurred and could continue to occur, the aggregate impact that COVID-19 could have on the Company’s financial condition and operating results remains highly uncertain.

In response to COVID-19, the Federal Reserve has taken action to lower the Federal Funds rate, which has adversely affected interest income and therefore, the Company’s results of operations and financial condition.

The Federal Reserve has continued

its commitment to this approach, indicating that the target Federal Funds rate would remain at current levels until the economy is in a more stable employment and price-stability position.

To the extent the business disruption continues for an extended period, additional cost control actions will be considered.

Future asset impairment charges, increases in allowance for credit losses, or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis and its effect on the Company’s borrowers.

For payment processing services, business closures, including constrictions in the manufacturing sector, have led to a decrease in the number of transactions and dollars processed due to the decline in customers’

business activity.

In addition, the dampened demand for oil and resulting plummet in oil prices has had, and can continue to have, a negative effect on both the number of freight transactions processed and the dollar amount of invoices processed.

To the extent any business disruptions continue for an extended period, additional cost control actions will be considered.

For payment processing services, business closures cause a decrease in the number of transactions and dollars processed due to the decline in customers’ business activity.

Other financial impact could occur, though such potential impact is unknown at this time.

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The Company maintains access to multiple sources of liquidity.

If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.

If an extended recession caused large numbers of the Bank’s customers to draw down deposits, the Company might become more reliant on more expensive sources of funding.

Asset valuation - Currently, the Company does not expect COVID-19 to affect its ability to fairly value the assets on its balance sheet;

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While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The economic slowdown as a result of COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, necessitate a goodwill or intangible asset impairment test and result in an impairment charge being recorded for that period.

An economic slowdown as a result of COVID-19 could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, necessitate a goodwill or intangible asset impairment test and result in an impairment charge being recorded for that period.

In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Such a charge would have no impact on tangible capital or regulatory capital.

Processes, controls and business continuity - In accord with its federally mandated Pandemic Plan and Business Continuity Plan, Cass has deployed its remote workforce program.

Most Cass employees around the globe are now working and conducting business remotely.

Employees necessary to oversee certain business coordination activities or to conduct essential physical activities such as mail handling and scanning operations, remain in offices.

In addition, employees are now being permitted to return to the offices on a voluntary basis.

Employees are required to report any exposure or diagnosis and must adhere to the defined safety protocol to enter the offices.

In the past several years, Cass has invested in sophisticated technology initiatives that enable employees to operate remotely with full system(s) access along with unified and transparent voice and electronic communications capabilities, ensuring seamless service delivery.

Processes, controls and business continuity - In accordance with its federally mandated Pandemic Plan and Business Continuity Plan, many Cass employees around the globe continue to work and conduct business remotely.

The Company cannot predict when or how it will fully lift the actions put in place as part of the Business Continuity Plan, including work from home requirements and travel restrictions.

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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.

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, 2021 and 2020, the Company and the Bank met all capital adequacy requirements to which they are subject.

Effective July 2, 2013, the Federal Reserve Board approved final rules known as the “Basel III Capital Rules”

that substantially revised the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank.

The Basel III Capital Rules implement aspects of the Basel III capital

framework agreed upon by the Basel Committee and incorporate changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Among other things, the Basel III Capital Rules establish stricter capital requirements and calculation standards, as well as more restrictive risk weightings for certain loans and facilities.

The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015, subject to a phase-in period that ended on January 1, 2019.

The Bank is also subject to the regulatory framework for prompt corrective action.

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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.

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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, 2020, unappropriated retained earnings of $ 48,680,000 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.

Under the foregoing dividend restrictions and while maintaining its “well capitalized” status, at December 31, 2021, unappropriated retained earnings of $ 34,976,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 2021 and 2020.

The Company’s and the Bank’s actual and required capital amounts and ratios are as follows:

Requirement to be

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)

(In thousands) Amount Ratio Amount Ratio Amount Ratio

At December 31, 2021

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