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) 2021 2020 Assets Cash and due from banks $ 12,301 $ 30,985 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 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 Premises and equipment, net 18,113 18,057 Investments in bank-owned life insurance 43,176 18,058 Goodwill 14,262 14,262 Other intangible assets, net 2,564 3,423 Other assets 48,452 46,886 Total assets $ 2,554,901 $ 2,203,235 Liabilities and Shareholders’ Equity Liabilities: Deposits Noninterest-bearing $ 582,642 $ 493,504 Interest-bearing 638,861 557,352 Total deposits 1,221,503 1,050,856 Accounts and drafts payable 1,050,396 835,386 Other liabilities 37,204 55,833 Total liabilities 2,309,103 1,942,075 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, 2021 and 2020; 13,734,295 and 14,392,669 shares outstanding at December 31, 2021 and 2020, respectively. 7,753 7,753 Additional paid-in capital 204,276 204,875 Retained earnings 112,220 99,062 Common shares in treasury, at cost ( 1,771,477 and 1,113,103 shares at December 31, 2021 and 2020, respectively) ( 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. 37 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) 2021 2020 2019 Fee Revenue and Other Income: Information services payment and processing revenue $ 106,455 $ 97,204 $ 107,953 Bank service fees 2,239 1,704 1,386 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 Interest Income: Interest and fees on loans 35,178 37,665 36,461 Interest and dividends on securities: Taxable 2,547 1,692 2,497 Exempt from federal income taxes 7,046 7,104 7,839 Interest on federal funds sold and other short-term investments 726 1,226 5,812 Total interest income 45,497 47,687 52,609 Interest Expense: Interest on deposits 1,171 2,360 5,191 Interest on short-term borrowings — 2 2 Total interest expense 1,171 2,362 5,193 Net interest income 44,326 45,325 47,416 (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 Other operating 16,743 15,387 18,065 Total operating expense 120,326 114,615 119,769 Income before income tax expense 33,821 30,341 37,466 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 Diluted Earnings Per Share 2.00 1.73 2.07 See accompanying notes to consolidated financial statements. 38 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, (In thousands) 2021 2020 2019 Comprehensive Income: Net income $ 28,604 $ 25,176 $ 30,404 Other comprehensive income (loss): 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 468 13,905 4,952 Total comprehensive income $ 29,072 $ 39,081 $ 35,356 See accompanying notes to consolidated financial statements. 39 Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 2021 2020 2019 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: 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 (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 ) (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 ) Net cash provided by operating activities 34,547 47,781 42,126 Cash Flows From Investing Activities: Proceeds from sales of securities available-for-sale 63,774 21,943 4,648 Proceeds from maturities of securities available-for-sale 96,951 63,789 21,502 Purchases of securities available-for-sale ( 494,226 ) ( 20,043 ) — Net increase in loans ( 68,664 ) ( 119,183 ) ( 50,970 ) 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 ) Asset acquisition of Gateway Giving, LLC — — ( 2,833 ) Net cash used in investing activities ( 528,517 ) ( 43,900 ) ( 75,757 ) Cash Flows From Financing Activities: Net increase in noninterest-bearing demand deposits 89,138 142,413 37,833 Net increase (decrease) in interest-bearing demand and savings deposits 90,310 166,289 ( 1,133 ) 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 ) Net (decrease) increase in short-term borrowings — ( 18,000 ) 18,000 Cash dividends paid ( 15,446 ) ( 15,599 ) ( 15,234 ) Purchase of common shares for treasury ( 30,997 ) ( 6,825 ) ( 7,799 ) Other financing activities, net ( 850 ) ( 1,098 ) ( 1,125 ) Net cash provided by financing activities 338,370 462,693 6,652 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 Cash and cash equivalents at end of year $ 514,928 $ 670,528 $ 203,954 Supplemental information: Cash paid for interest $ 1,194 $ 2,426 $ 5,181 Cash paid for income taxes 5,637 4,732 7,604 40 Table of Contents See accompanying notes to consolidated financial statements. 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, 2018 $ 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 ) Stock-based compensation expense 3,144 3,144 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 ) Stock-based compensation expense 2,267 2,267 Purchase of 162,901 common shares ( 6,825 ) ( 6,825 ) Other comprehensive income 13,905 13,905 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 See accompanying notes to consolidated financial statements. 41 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 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’ 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 . 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. 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. 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. 42 Table of Contents 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. 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 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. 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 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. 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 43 Table of Contents 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 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, 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. 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 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 44 Table of Contents 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. 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. 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. 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 45 Table of Contents 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. 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 bases. 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. 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, 2021, rate of increase in future compensation levels and 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. 46 Table of Contents 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 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 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. The ASU required measurement and recognition of expected credit losses for financial instruments held at amortized cost, which include allowances for credit losses expected over the life of the portfolio, rather than incurred losses, which include allowances for current known and inherent losses within the portfolio. Under this standard, the Company is required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit and other similar instruments. In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities. 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. 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 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 Assets: Allowance for loan/credit losses on loans $ 10,556 $ 723 $ 11,279 Deferred tax asset 2,298 269 2,567 Liabilities: Reserve for unfunded commitments — 402 402 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. 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 47 Table of Contents 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 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 uncertain. To the extent any business disruptions continue 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 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. Capital and liquidity - While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by future financial losses. The Company maintains access to multiple sources of liquidity. 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; however, this could change in future periods. 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. 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 accordance with its federally mandated Pandemic Plan and Business Continuity Plan, many Cass employees around the globe continue to work and conduct business remotely. 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. 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. Cass does not believe the work from home protocol has materially adversely impacted internal controls, financial reporting systems, or operations. 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 48 Table of Contents 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. The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 2021, 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, 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. 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, 2021 and 2020. 49 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, 2021 Total capital (to risk-weighted assets) Cass Information Systems, Inc. $ 240,265 14.86 % $ 129,339 8.00 % $ N/A N/A % Cass Commercial Bank 174,614 17.21 81,163 8.00 101,454 10.00 Common Equity Tier I Capital (to risk-weighted assets) Cass Information Systems, Inc. 228,224 14.11 72,764 4.50 N/A N/A Cass Commercial Bank 163,030 16.07 45,654 4.50 65,945 6.50 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. 228,224 14.11 97,019 6.00 N/A N/A Cass Commercial Bank 163,030 16.07 60,872 6.00 81,163 8.00 Tier I capital (to average assets) Cass Information Systems, Inc. 228,224 9.21 99,163 4.00 N/A N/A Cass Commercial Bank 163,030 11.05 59,036 4.00 73,795 5.00 At December 31, 2020 Total capital (to risk-weighted assets) Cass Information Systems, Inc. $ 255,332 21.41 % $ 95,388 8.00 % $ N/A N/A % Cass Commercial Bank 171,298 21.46 63,855 8.00 79,819 10.00 Common Equity Tier I Capital (to risk-weighted assets) Cass Information Systems, Inc. 243,388 20.41 53,656 4.50 N/A N/A Cass Commercial Bank 161,300 20.21 35,918 4.50 51,882 6.50 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. 243,388 20.41 71,541 6.00 N/A N/A Cass Commercial Bank 161,300 20.21 47,891 6.00 63,855 8.00 Tier I capital (to average assets) Cass Information Systems, Inc. 243,388 11.52 84,511 4.00 N/A N/A Cass Commercial Bank 161,300 14.48 44,543 4.00 55,679 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, 2021 and 2020 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 50 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, 2021 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and political subdivisions $ 359,187 $ 12,931 $ ( 990 ) $ 371,128 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 170,711 135 ( 2,200 ) 168,646 Corporate bonds 84,538 72 ( 272 ) 84,338 Asset backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises 49,835 — ( 494 ) 49,341 Total $ 664,271 $ 13,138 $ ( 3,956 ) $ 673,453 December 31, 2020 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and political subdivisions $ 287,059 $ 18,915 $ — $ 305,974 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 50,988 764 — 51,752 Total $ 338,047 $ 19,679 $ — $ 357,726 The fair values of securities with unrealized losses are as follows: December 31, 2021 Less than 12 months 12 months or more Total (In thousands) Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses State and political subdivisions $ 60,083 $ 990 $ — $ — $ 60,083 $ 990 Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises 163,652 2,200 — — 163,652 2,200 Corporate bonds 55,120 272 — — 55,120 272 Asset backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises 49,341 494 — — 49,341 494 Total $ 328,196 $ 3,956 $ — $ — $ 328,196 $ 3,956 There were 101 securities, or 28 %, in an unrealized loss position as of December 31, 2021 compared to zero securities in an unrealized loss position as of December 31, 2020. No ne of these securities were in an unrealized loss position for greater than 12 months at December 31, 2021. The amortized cost and fair value of debt and equity securities by 51 Table of Contents 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, 2021 (In thousands) Amortized Cost Fair Value Due in 1 year or less $ 23,959 $ 24,211 Due after 1 year through 5 years 117,319 122,329 Due after 5 years through 10 years 224,344 231,142 Due after 10 years 298,649 295,771 Total $ 664,271 $ 673,453 The premium related to the purchase of state and political subdivisions was $ 6,361,000 and $ 6,013,000 at December 31, 2021 and 2020, respectively. There were no securities pledged to secure public deposits or for other purposes at December 31, 2021. Proceeds from sales of investment securities classified as available-for-sale were $ 63,774,000 in 2021, $ 21,943,000 in 2020, and $ 4,648,000 in 2019. Gross realized gains on the sales in 2021, 2020, and 2019 were $ 55,000 , $ 1,075,000 , and $ 19,000 , respectively. There were $ 4,000 of gross realized losses on sales in 2021 and no gross realized losses in 2020 or 2019. The Company did not recognize credit losses on any available for sale debt securities in 2021 or 2020. 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, Orange County, California, 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 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) 2021 2020 Commercial and industrial $ 450,336 $ 298,984 Real estate: Commercial: Mortgage 108,759 100,419 Construction 24,797 25,090 Faith-based: Mortgage 355,582 333,661 Construction 14,664 23,818 PPP 6,299 109,704 Other 130 — Total loans $ 960,567 $ 891,676 52 Table of Contents The following table presents the aging of loans by loan categories at December 31, 2021: Performing Nonperforming (In thousands) Current 30-59 Days 60-89 Days 90 Days and Over Non- accrual Total Loans Commercial and industrial $ 450,336 $ — $ — $ — $ — $ 450,336 Real estate Commercial: Mortgage 108,759 — — — — 108,759 Construction 24,797 — — — — 24,797 Faith-based: Mortgage 355,582 — — — — 355,582 Construction 14,664 — — — — 14,664 PPP 6,299 — — — — 6,299 Other 130 — — — — 130 Total $ 960,567 $ — $ — $ — $ — $ 960,567 The following table presents the aging of loans by loan categories at December 31, 2020: Performing Nonperforming (In thousands) Current 30-59 Days 60-89 Days 90 Days and Over Non- accrual Total Loans Commercial and industrial $ 298,984 $ — $ — $ — $ — $ 298,984 Real estate Commercial: Mortgage 100,419 — — — — 100,419 Construction 25,090 — — — — 25,090 Faith-based: Mortgage 333,661 — — — — 333,661 Construction 23,818 — — — — 23,818 PPP 109,704 — — — — 109,704 Total $ 891,676 $ — $ — $ — $ — $ 891,676 53 Table of Contents The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2021: (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 $ 440,607 $ 9,729 $ — $ 450,336 Real estate Commercial: Mortgage 108,759 — — 108,759 Construction 24,797 — — 24,797 Faith-based: Mortgage 352,717 2,865 — 355,582 Construction 14,664 — — 14,664 PPP 6,299 — — 6,299 Other 130 — — 130 Total $ 947,973 $ 12,594 $ — $ 960,567 (1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk 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 high level of management attention. The Company had no loans that were considered individually evaluated credits at December 31, 2021. The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2020: (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 $ 284,882 $ 14,102 $ — $ 298,984 Real estate Commercial: Mortgage 99,044 1,375 — 100,419 Construction 25,090 — — 25,090 Faith-based: Mortgage 330,554 3,107 — 333,661 Construction 23,818 — — 23,818 PPP 109,704 — — 109,704 Total $ 873,092 $ 18,584 $ — $ 891,676 (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 high level of management attention. 54 Table of Contents The Company had one loan that was considered an individually evaluated credit in the amount of $ 2,500,000 at December 31, 2020, with a specific allowance for credit loss of $ 500,000 . There were no loan modifications considered as troubled debt restructurings during the year ended December 31, 2021. The recorded investment by category for loans considered as troubled debt restructurings during the year ended December 31, 2020 is as follows: (In thousands) Number of Loans Pre-Modification Outstanding Balance Post-Modification Outstanding Balance Commercial and industrial 1 $ 8,773 $ 8,773 Faith-based real estate 1 1,029 1,029 Total 2 $ 9,802 $ 9,802 During the year ended December 31, 2020, two loans were restructured to change the amortization schedule to reduce payments from the borrowers while the contractual interest rate remained unchanged. There were no loans restructured that subsequently defaulted during the years ended December 31, 2021 or 2020. A summary of the ACL by category for the period ended December 31, 2021 is as follows: (In thousands) C&I CRE Faith-based CRE Construction Total Allowance for credit losses on loans: Balance at December 31, 2020 $ 4,635 $ 1,175 $ 5,717 $ 417 $ 11,944 Provision for (release of) credit losses (1) 387 ( 144 ) ( 48 ) ( 125 ) 70 Recoveries 12 — 15 — 27 Balance at December 31, 2021 $ 5,034 $ 1,031 $ 5,684 $ 292 $ 12,041 (1) For the period ended December 31, 2021, there was a release of credit losses of $ 200,000 for unfunded commitments. A summary of the ACL by category for the period ended December 31, 2020 is as follows: (In thousands) C&I CRE Faith-based CRE Construction Total Allowance for credit losses on loans: Balance at December 31, 2019 $ 4,874 $ 1,528 $ 3,842 $ 312 $ 10,556 Cumulative effect of accounting change (ASU 2016-13) ( 526 ) ( 401 ) 1,636 14 — Balance at January 1, 2020 4,348 1,127 5,478 326 11,279 Provision for credit losses 268 48 238 91 645 Recoveries 19 — 1 — 20 Balance at December 31, 2020 $ 4,635 $ 1,175 $ 5,717 $ 417 $ 11,944 (1) For the period ended December 31, 2020, there was a provision for credit losses of $ 165,000 for unfunded commitments. As of December 31, 2021 and 2020, there were loans totaling $ 0 and $ 161,475 , respectively, to affiliates of executive officers or directors. 55 Table of Contents Note 5 Premises and Equipment A summary of premises and equipment is as follows: December 31, (In thousands) 2021 2020 Land $ 873 $ 873 Buildings 14,834 14,763 Leasehold improvements 2,036 1,953 Furniture, fixtures and equipment 13,551 12,897 Purchased software 4,640 4,278 Internally developed software 22,665 19,538 58,599 54,302 Less accumulated depreciation 40,486 36,245 Total $ 18,113 $ 18,057 Total depreciation charged to expense in 2021, 2020 and 2019 amounted to $ 4,313,000 , $ 4,471,000 , and $ 4,227,000 , 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: December 31, 2021 December 31, 2020 (In thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Assets eligible for amortization: Customer lists $ 4,778 $ ( 4,341 ) $ 4,778 $ ( 3,902 ) Patent 72 ( 28 ) 72 ( 24 ) Software 2,844 ( 1,104 ) 2,844 ( 731 ) Trade Name 190 ( 22 ) 190 ( 13 ) Other 500 ( 325 ) 500 ( 291 ) Unamortized intangible assets: Goodwill 14,262 — 14,262 — Total intangible assets $ 22,978 $ ( 6,152 ) $ 22,978 $ ( 5,293 ) Customer lists are amortized over 7 and 10 years; patents over 18 years, software over 3 years and 7 years, trade name over 20 years and other intangible assets over 15 years. Amortization of intangible assets amounted to $ 859,000 for the years ended December 31, 2021, and 2020. Estimated future amortization of intangibles is $ 540,000 in both 2022 and 2023, $ 498,000 in 2024, $ 490,000 in 2025, and $ 342,000 in 2026. 56 Table of Contents Note 7 Interest-Bearing Deposits Interest-bearing deposits consist of the following: December 31, (In thousands) 2021 2020 Interest-bearing demand deposits $ 573,567 $ 480,283 Savings deposits 18,110 21,084 Time deposits: Less than $100 3,536 4,091 $100 to less than $250 30,648 34,998 $250 or more (1) 13,000 16,896 Total $ 638,861 $ 557,352 Weighted average interest rate 0.15 % 0.31 % (1) The scheduled maturities of time deposits not covered by deposit insurance consist of $ 7,010,000 within one year and $ 5,990,000 within one to three years. December 31, (In thousands) 2021 2020 2019 Interest-bearing demand deposits $ 582 $ 1,313 $ 3,686 Savings deposits 9 24 103 Time deposits: Less than $100 332 550 905 $100 to less than $250 109 206 216 $250 or more 139 267 281 Total $ 1,171 $ 2,360 $ 5,191 The scheduled maturities of time deposits are summarized as follows: December 31, 2021 2020 (In thousands) Amount Percent of Total Amount Percent of Total Due within: One year $ 30,855 65.4 % $ 39,575 70.7 % Two years 15,061 31.9 % 10,470 18.7 % Three years 1,205 2.6 % 5,892 10.5 % Four years 48 0.1 % — — % Five years 15 — % 48 0.1 % Total $ 47,184 100.0 % $ 55,985 100.0 % Note 8 Unused Available Lines of Credit As of December 31, 2021, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $ 83,000,000 in aggregate. As of December 31, 2021, the Bank had secured lines of credit with the Federal Home Loan Bank of $ 228,849,000 collateralized by commercial mortgage loans. At December 31, 2021, the Company had lines of credit from two banks up to a maximum of $ 150,000,000 in aggregate collateralized by state and 57 Table of Contents political subdivision securities. There were no amounts outstanding at December 31, 2021, and 2020 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 2021. 2021 Shares outstanding at January 1 14,392,669 Issuance of common stock: Employee restricted stock grants 22,393 Employee restricted stock units vested 2,232 Performance-based stock vested 18,336 Employee SARs exercised 7,810 Directors’ stock grants 5,450 Shares repurchased ( 713,857 ) Shares forfeited ( 738 ) Shares outstanding at December 31 13,734,295 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: December 31, (In thousands except share and per share data) 2021 2020 2019 Basic: Net income $ 28,604 $ 25,176 $ 30,404 Weighted average common shares outstanding 14,091,773 14,364,406 14,434,445 Basic earnings per share $ 2.03 $ 1.75 $ 2.11 Diluted: Net income $ 28,604 $ 25,176 $ 30,404 Weighted average common shares outstanding 14,091,773 14,364,406 14,434,445 Effect of dilutive restricted stock, performance based restricted stock (“PBRS”), and SARs 238,103 202,541 257,480 Weighted average common shares outstanding assuming dilution 14,329,876 14,566,947 14,691,925 Diluted earnings per share $ 2.00 $ 1.73 $ 2.07 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. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit 58 Table of Contents credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the Plan over a period of approximately 30 years. 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) 2021 2020 Projected benefit obligation: Balance, January 1 $ 122,035 $ 119,827 Service cost 1,002 4,329 Interest cost 3,076 3,908 Actuarial (gain) loss ( 5,822 ) 15,087 Plan amendments — ( 18,322 ) Benefits paid ( 2,968 ) ( 2,794 ) Balance, December 31 $ 117,323 $ 122,035 Plan assets: Fair value, January 1 $ 106,667 $ 94,634 Actual return 10,107 14,826 Employer contribution 330 — Benefits paid ( 2,968 ) ( 2,793 ) Fair value, December 31 $ 114,136 $ 106,667 Funded status: Accrued pension liability $ ( 3,187 ) ( 15,368 ) The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2021, 2020 and 2019, the Plan’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve. For 2021, the Pri-2012 Mortality Table and MP-2022 Mortality Improvement Scale were used. For 2020, the Pri-2012 Mortality Table and MP-2020 Mortality Improvement Scale were used. For 2019, the Pri-2012 Mortality Table and MP-2019 Mortality Improvement Scale were used. 2021 2020 2019 Weighted average discount rate 2.85 % 2.55 % 3.30 % Rate of increase in compensation levels (a) (a) (a) (a) 6.0 % graded down to 3.25 % over the first seven years of service. The accumulated benefit obligation was $ 117,323,000 and $ 121,095,000 as of December 31, 2021 and 2020, respectively. The Company made a contribution of $ 330,000 during 2021, while in 2020 there was no contribution made to the Plan. The Company has not determined if it will make a contribution to the Plan in 2022. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the Plan: Amount 2022 $ 3,771,000 2023 4,165,000 2024 4,396,000 2025 4,593,000 2026 4,802,000 2026-2030 26,978,000 59 Table of Contents The Plan’s pension cost included the following components: For the Year Ended December 31, (In thousands) 2021 2020 2019 Service cost – benefits earned during the year $ 1,002 $ 4,329 $ 3,555 Interest cost on projected benefit obligations 3,076 3,908 4,103 Expected return on plan assets ( 6,310 ) ( 6,049 ) ( 4,753 ) Net amortization and deferral 393 1,946 1,559 Net periodic pension (benefit) cost $ ( 1,839 ) $ 4,134 $ 4,464 The following represent the major assumptions used to determine the net pension cost of the Plan: 2021 2020 2019 Weighted average discount rate 2.55 % 3.30 % 4.30 % Rate of increase in compensation levels (a ) (a ) (a ) Expected long-term rate of return on assets 6.00 % 6.50 % 6.50 % (a) 6.0 % graded down to 3.25 % over the first seven years of service For 2021, the Pri-2012 Mortality Table and the MP-2020 Mortality Improvement Table were used. For 2020, the Pri-2012 Mortality Table and the MP-2019 Mortality Improvement Table were used. For 2019, the RP-2014 Mortality Table and the MP-2018 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 51 % fixed income, 23 % U.S. equity and 26 % non-U.S. 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 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 51 % 3.95 % 8.82 % Large Cap U.S. Equities 18 % 7.24 % 17.27 % Small Cap U.S. Equities 5 % 8.57 % 22.09 % International (Developed) 18 % 8.34 % 18.39 % International (Emerging) 8 % 11.12 % 27.24 % Applying appropriate correlation factors between each of the asset classes the long-term rate of return on assets is estimated to be 6.00 %. 60 Table of Contents A summary of the fair value measurements by type of asset is as follows: Fair Value Measurements as of December 31, 2021 2020 (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 $ 535 $ 535 $ — $ 484 $ 484 $ — Real estate investment trusts 6,250 — 6,250 — — — Equity securities U.S. Small/Mid Cap Growth 4,734 — 4,734 5,530 — 5,530 Non-U. S. Core 19,164 — 19,164 26,342 — 26,342 U.S. Large Cap Passive 18,279 — 18,279 17,520 — 17,520 Emerging Markets 7,701 — 7,701 5,882 — 5,882 Fixed Income U.S. Core 51,386 — 51,386 23,467 — 23,467 U.S. Passive — — — 21,680 — 21,680 Opportunistic 6,087 — 6,087 5,762 — 5,762 Total $ 114,136 $ 535 $ 113,601 $ 106,667 $ 484 $ 106,183 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) 2021 2020 Benefit obligation: Balance, January 1 $ 13,412 $ 11,712 Service cost 147 121 Interest cost 291 347 Benefits paid ( 282 ) ( 291 ) Actuarial (gain)/loss ( 1,148 ) 1,523 Balance, December 31 $ 12,420 $ 13,412 The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2021, 2020 and 2019, the SERP’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve. 2021 2020 2019 Weighted average discount rate 2.65 % 2.20 % 3.00 % Rate of increase in compensation levels (a) (a) (a) (a) 6.00 % graded down to 3.25 % over the first seven years of service. 61 Table of Contents The accumulated benefit obligation was $ 12,420,000 and $ 12,492,000 as of December 31, 2021 and 2020, respectively. Since this is an unfunded plan, there are no plan assets. Benefits paid were $ 282,000 in 2021, $ 291,000 in 2020, and $ 262,000 in 2019. Expected future benefits payable by the Company over the next ten years are as follows: Amount 2022 $ 823,000 2023 804,000 2024 802,000 2025 799,000 2026 795,000 2026-2030 $ 3,878,000 Net periodic pension cost related to the SERP included the following components: For the Year Ended December 31, (In thousands) 2021 2020 2019 Service cost – benefits earned during the year $ 147 $ 121 $ 97 Interest cost on projected benefit obligations 291 347 408 Net amortization and deferral 203 112 276 Net periodic pension cost $ 641 $ 580 $ 781 The pretax amounts in accumulated other comprehensive loss as of December 31 were as follows: The Plan SERP (In thousands) 2021 2020 2021 2020 Prior service cost $ — $ — $ — $ — Net actuarial loss 5,417 15,429 2,783 4,135 Total $ 5,417 $ 15,429 $ 2,783 $ 4,135 The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2021 expected to be recognized as components of net periodic benefit cost in 2022 for the Plan are both $ 0 . The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2021 expected to be recognized as components of net periodic benefit cost in 2022 for the SERP are $ 0 and $ 108,000 respectively. 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 2021, 2020, and 2019 was $ 6,436,000 , $ 5,665,000 , and $ 6,841,000 , 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 2021, 2020 and 2019 were $ 3,488,000 , $ 1,508,000 , and $ 1,378,000 , respectively. In conjunction with the freezing of the Plan, contribution rates to employees increased on March 1, 2021. Note 11 Stock-based Compensation The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) provides incentive opportunities for key employees and non-employee directors and to align the personal financial interests of such individuals with those of the Company’s shareholders. The Omnibus Plan permits the issuance of up to 1,500,000 shares of the Company’s common stock in the form of stock options, SARs, restricted stock, restricted stock units and performance awards. 62 Table of Contents 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, 2021 were as follows: Shares Weighted Average Grant Date Fair Value Balance at December 31, 2020 136,167 $ 46.78 Granted 53,906 $ 41.55 Vested ( 23,782 ) $ 48.43 Forfeited ( 738 ) $ 46.07 Balance at December 31, 2021 165,553 $ 44.81 During 2020 and 2019, 38,226 and 36,812 shares, respectively, were granted with weighted average per share market values at date of grant of $ 47.07 in 2020 and $ 49.30 in 2019. The fair value of such shares are based on the market price on the date of grant. Amortization of the restricted stock bonus awards totaled $ 1,793,000 for 2021, $ 1,463,000 for 2020 and $ 1,551,000 for 2019. As of December 31, 2021, the total unrecognized compensation expense related to non-vested restricted stock awards was $ 1,647,000 , and the related weighted average period over which it is expected to be recognized is approximately 0.57 years. The total fair value of shares vested during the years ended December 2021, 2020, and 2019 was $ 1,152,000 , $ 1,005,000 , and $ 527,000 , 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 Years Ended December 31, 2021 Shares Fair Value Balance at December 31, 2020 98,410 $ 50.64 Granted 52,240 40.74 Vested ( 33,000 ) 49.07 Forfeited ( 1,107 ) 46.07 Balance at December 31, 2021 116,543 $ 46.79 The PBRS that vested during the year ended December 31, 2021 achieved financial goals of 94.4 %, resulting in the issuance of 31,150 shares of common stock. The PBRS that vested during the year ended December 31, 2020 achieved financial goals of 117.3 %, resulting in the issuance of 34,222 shares of common stock. The outstanding PBRS at December 31, 2021 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 2021, there were no SARs granted and no expense recognized. As of December 31, 2021, there was no unrecognized compensation expense related to SARs. 63 Table of Contents Changes in SARs outstanding for the year ended December 31, 2021 were as follows: SARs Weighted Average Exercise Price Balance at December 31, 2020 144,999 $ 32.99 Exercised ( 25,822 ) 24.38 Forfeited ( 2,088 ) 31.92 Balance at December 31, 2021 117,089 34.91 Exercisable at December 31, 2021 117,089 $ 34.91 The total intrinsic value of SARs exercised during 2021 and 2020 was $ 630,000 and $ 275,000 , respectively. The average remaining contractual term for SARs outstanding as of December 31, 2021 was 1.21 years, and the aggregate intrinsic value was $ 741,000 . The average remaining contractual term for SARs outstanding as of December 31, 2020 was 1.95 years, and the aggregate intrinsic value was $ 1,095,000 . The total compensation cost for share-based payment arrangements was $ 2,859,000 , $ 2,267,000 , and $ 3,144,000 , in 2021, 2020, and 2019, respectively. Note 12 Other Operating Expense Details of other operating expense are as follows: For the Years Ended December 31, (In thousands) 2021 2020 2019 Postage and supplies $ 1,851 $ 1,465 $ 1,875 Promotional expense 2,627 2,184 3,838 Professional fees 1,625 2,140 2,388 Outside service fees 7,413 5,845 5,529 Data processing services 2,650 1,900 1,283 Telecommunications 554 765 748 Other 23 1,088 2,404 Total other operating expense $ 16,743 $ 15,387 $ 18,065 Note 13 Income Taxes The components of income tax expense (benefit) are as follows: For the Years Ended December 31, (In thousands) 2021 2020 2019 Current: Federal $ 5,018 $ 5,350 $ 4,423 State 897 671 1,392 Deferred: Federal ( 608 ) ( 636 ) 1,097 State ( 90 ) ( 220 ) 150 Total income tax expense $ 5,217 $ 5,165 $ 7,062 64 Table of Contents 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) 2021 2020 2019 Expected income tax expense $ 7,103 $ 6,385 $ 7,868 (Reductions) increases resulting from: Tax-exempt income ( 1,673 ) ( 1,588 ) ( 1,755 ) State taxes, net of federal benefit 638 356 1,218 Share-based compensation adjustment 92 70 ( 281 ) Federal tax credits ( 357 ) ( 336 ) ( 158 ) Other, net ( 586 ) 278 170 Total income tax expense $ 5,217 $ 5,165 $ 7,062 Income tax expense in 2021 totaled $ 5,217,000 compared to $ 5,165,000 and $ 7,062,000 in 2020 and 2019, respectively. When measured as a percent of pre-tax income, the Company’s effective tax rate was 15.4 % in 2021, 17.0 % in 2020, and 18.8 % in 2019. 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) 2021 2020 Deferred tax assets: Allowance for credit losses $ 2,866 $ 2,858 ASC 715 pension funding liability 1,952 4,656 Supplemental executive retirement plan accrual 2,293 2,220 Stock compensation 1,875 1,794 Lease liability 1,145 1,436 Other 633 — Total deferred tax assets $ 10,764 $ 12,964 Deferred tax liabilities: Premises and equipment $ ( 2,235 ) $ ( 2,693 ) Pension ( 531 ) ( 14 ) Intangible assets ( 1,493 ) ( 1,761 ) Unrealized gain on investment securities available-for-sale ( 2,185 ) ( 4,684 ) Right of use asset ( 1,032 ) ( 1,291 ) Other ( 497 ) ( 224 ) Total deferred tax liabilities $ ( 7,973 ) $ ( 10,667 ) Net deferred tax assets $ 2,791 $ 2,297 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, 2021 or 2020, due to management’s belief that it is more likely than not that the deferred tax asset is realizable. 65 Table of Contents The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table: (In thousands) 2021 2020 2019 Balance at January 1 $ 1,231 $ 1,299 $ 1,403 Changes in unrecognized tax benefits as a result of tax positions taken during a prior year 165 62 56 Changes in unrecognized tax benefits as a result of tax position taken during the current year 239 233 171 Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations ( 230 ) ( 315 ) ( 331 ) Decreases in unrecognized tax benefits as a result of settlements with taxing authorities — ( 48 ) — Balance at December 31 $ 1,405 $ 1,231 $ 1,299 At December 31, 2021, 2020 and 2019, the balances of the Company’s unrecognized tax benefits which would, if recognized, affect the Company’s effective tax rate were $ 1,134,000 , $ 1,096,000 and $ 1,184,000 , respectively. These amounts are net of the offsetting benefits from other taxing jurisdictions. As of December 31, 2021, 2020 and 2019, the Company had $ 85,000 , $ 114,000 and $ 151,000 , 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 $ 199,000 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 2018, 2019 and 2020 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2017 through 2020. 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, 2021 2020 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value Balance sheet assets: Cash and cash equivalents $ 514,928 $ 514,928 $ 670,528 $ 670,528 Investment securities 673,453 673,453 357,726 357,726 Loans, net 948,526 948,701 879,732 883,461 Accrued interest receivable 6,799 6,799 6,850 6,850 Total $ 2,143,706 $ 2,143,881 $ 1,914,836 $ 1,918,565 Balance sheet liabilities: Deposits $ 1,221,503 $ 1,221,503 $ 1,050,856 $ 1,050,856 Accounts and drafts payable 1,050,396 1,050,396 835,386 835,386 Accrued interest payable 16 16 38 38 Total $ 2,271,915 $ 2,271,915 $ 1,886,280 $ 1,886,280 66 Table of Contents 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. Individually assessed loans are valued using the fair value of the collateral which is based upon an observable market price or current appraised value and therefore, the fair value is a nonrecurring Level 3 valuation. Accrued Interest Receivable The carrying amount approximates fair value. Deposits The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits. Accounts and Drafts Payable The carrying amount approximates fair value. Accrued Interest 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, 2021, an allowance for unfunded commitments of $ 367,000 had been recorded, as compared to $ 567,000 at December 31, 2020. See Item 8, "Financial Statements and Supplementary Data—Note 1” for information related to CECL adoption. 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. 67 Table of Contents The following table shows commitments to extend credit, standby letters of credit and commercial letters: December 31, (In thousands) 2021 2020 Commitments to extend credit $ 208,395 $ 192,916 Standby letters of credit 12,859 10,609 Commercial letters of credit 771 955 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. 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. Invoice 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. Invoice payment 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. Service charges are recognized on a monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components. 68 Table of Contents The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, Revenue from Contracts with Customers ("ASC 606") for the years ended December 31, 2021, 2020, and 2019. For the Years Ended December 31, (In thousands) 2021 2020 2019 Fee revenue and other income In-scope of ASC 606 Invoice processing fees $ 77,704 $ 74,674 $ 81,329 Invoice payment fees 28,751 22,530 26,624 Information services payment and processing revenue 106,455 97,204 107,953 Bank service fees 2,239 1,704 1,386 Fee revenue (in-scope of ASC 606) 108,694 98,908 109,339 Other income (out-of-scope of ASC 606) 997 1,533 730 Total fee revenue and other income $ 109,691 $ 100,441 $ 110,069 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. The Banking Services segment provides banking services primarily to privately held businesses and faith-based ministries, including on-line generosity services, 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 tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value. Substantially all revenue originates from, and all long-lived assets are located within the United States, and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue. Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Segment interest income is a function of the relative share of average funding sources generated by each segment multiplied by the following rates: • Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and • Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets. Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other. 69 Table of Contents Summarized information about the Company’s operations in each industry segment for the years ended December 31, 2021, 2020 and 2019 is as follows: (In thousands) Information Services Banking Services Corporate, Eliminations and Other Total 2021 Fee income from customers $ 105,452 $ 2,631 $ 1,608 $ 109,691 Interest income* 24,332 24,732 ( 1,694 ) 47,370 Interest expense — 1,171 — 1,171 Intersegment income (expense) — 3,222 ( 3,222 ) — Tax-equivalized pre-tax income* 26,368 10,082 ( 756 ) 35,694 Goodwill 12,433 1,829 — 14,262 Other intangible assets, net 329 2,235 — 2,564 Total Assets 1,152,917 1,500,060 ( 98,076 ) 2,554,901 Funding Sources 937,478 876,018 — 1,813,496 2020 Fee income from customers $ 96,548 $ 2,607 $ 1,286 $ 100,441 Interest income* 20,343 29,494 ( 261 ) 49,576 Interest expense — 2,362 — 2,362 Intersegment income (expense) — 2,315 ( 2,315 ) — Tax-equivalized pre-tax income* 17,178 14,025 1,027 32,230 Goodwill 12,433 1,829 — 14,262 Other intangible assets, net 735 2,688 — 3,423 Total Assets 967,702 1,242,688 ( 7,155 ) 2,203,235 Funding Sources 734,999 738,165 — 1,473,164 2019 Fee income from customers $ 107,942 $ 1,660 $ 467 $ 110,069 Interest income* 21,538 30,646 2,510 54,694 Interest expense — 5,193 — 5,193 Intersegment income (expense) — 2,107 ( 2,107 ) — Tax-equivalized pre-tax income* 23,524 13,048 2,978 39,550 Goodwill 12,433 1,829 — 14,262 Other intangible assets, net 1,142 3,139 — 4,281 Total Assets 844,483 915,341 4,419 1,764,243 Funding Sources 676,068 592,905 — 1,268,973 * Presented on a tax-equivalent basis assuming a tax rate of 21%. The tax-equivalent adjustment was approximately $ 1,873,000 for 2021, $ 1,888,000 for 2020, and $ 2,084,000 for 2019. Note 18 Leases The Company leases certain premises under operating leases. As of December 31, 2021, the Company had lease liabilities of $ 4,887,000 and right-of-use assets of $ 4,421,000 . 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 2021 was operating lease cost of $ 1,651,000 , short-term lease cost of $ 186,000 , and there was no variable lease cost. The Company paid cash of $ 1,779,000 for operating lease amounts included in the measurement of lease liabilities for the year ended December 31, 2021. No right-of-use assets were obtained in exchange for lease liabilities during the year ended December 31, 2021. 70 Table of Contents For the year ended December 31, 2021, the weighted average remaining lease term for the operating leases was 6.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.4 %. 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. There has been no significant change in the Company’s expected future minimum lease payments since December 31, 2020. A maturity analysis of operating lease liabilities and undiscounted cash flows as of December 31, 2021 was as follows: (In thousands) December 31, 2021 Lease payments due Less than 1 year $ 1,735 1-2 years 814 2-3 years 553 3-4 years 555 4-5 years 545 Over 5 years 1,497 Total undiscounted cash flows 5,699 Discount on cash flows 812 Total lease liability $ 4,887 There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the year ended December 31, 2021. At December 31, 2021, 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, 2021, and there were no events identified that would require additional disclosures to prevent the Company’s consolidated financial statements from being misleading. 71 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) 2021 2020 Assets Cash and due from banks $ 132,050 $ 51,714 Short-term investments 585 235,452 Securities available-for-sale, at fair value 566,835 357,726 Loans, net 40,515 49,314 Payments in advance of funding 291,427 194,563 Investments in subsidiaries 164,650 162,341 Premises and equipment, net 17,443 17,459 Other assets 95,940 69,162 Total assets $ 1,309,445 $ 1,137,731 Liabilities and Shareholders’ Equity Liabilities: Accounts and drafts payable $ 1,041,070 $ 832,420 Other liabilities 22,577 44,151 Total liabilities 1,063,647 876,571 Total shareholders’ equity 245,798 261,160 Total liabilities and shareholders’ equity $ 1,309,445 $ 1,137,731 Condensed Statements of Income For the Years Ended December 31, (In thousands) 2021 2020 2019 Income from subsidiaries – management fees $ 3,115 $ 2,854 $ 2,599 Information services revenue 104,426 95,078 106,198 Net interest income after (release of) provision for credit losses 11,316 10,932 15,713 Gain on sales of investment securities 51 1,075 19 Other income 919 458 518 Total income 119,827 110,397 125,047 Expenses: Salaries and employee benefits 80,434 77,577 81,432 Other expenses 27,406 25,347 26,136 Total expenses 107,840 102,924 107,568 Income before income tax and equity in undistributed income of subsidiaries 11,987 7,473 17,479 Income tax expense 635 340 2,860 Income before undistributed income of subsidiaries 11,352 7,133 14,619 Equity in undistributed income of subsidiaries 17,252 18,043 15,785 Net income $ 28,604 $ 25,176 $ 30,404 72 Table of Contents Condensed Statements of Cash Flows For the Years Ended December 31, (In thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 28,604 $ 25,176 $ 30,404 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed income of subsidiaries ( 17,252 ) ( 18,043 ) ( 15,785 ) Net change in other assets ( 212 ) 6,054 ( 6,289 ) Net change in other liabilities ( 9,307 ) ( 6,525 ) 9,474 Stock-based compensation expense 2,859 2,267 3,144 Other, net 20,921 18,236 6,104 Net cash provided by operating activities 25,613 27,165 27,052 Cash flows from investing activities: Net (increase) decrease in securities ( 226,090 ) 65,689 26,150 Net decrease (increase) in loans 8,799 ( 2,545 ) ( 24,999 ) Net (increase) decrease in payments in advance of funding ( 96,864 ) 11,595 ( 45,381 ) Purchase of bank-owned life insurance ( 25,119 ) — — Purchases of premises and equipment, net ( 2,233 ) ( 1,810 ) ( 2,637 ) Asset acquisition of Gateway Giving, LLC — — ( 2,833 ) Net cash (used in) provided by investing activities ( 341,507 ) 72,929 ( 49,700 ) Cash flows from financing activities: Net increase (decrease) in accounts and drafts payable 208,656 208,339 ( 21,875 ) Short-term borrowings — ( 18,000 ) 18,000 Cash dividends paid ( 15,446 ) ( 15,599 ) ( 15,234 ) Purchase of common shares for treasury ( 30,997 ) ( 6,825 ) ( 7,799 ) Other financing activities, net ( 850 ) ( 1,098 ) ( 1,125 ) Net cash provided by (used in) financing activities 161,363 166,817 ( 28,033 ) Net increase (decrease) in cash and cash equivalents ( 154,531 ) 266,911 ( 50,681 ) Cash and cash equivalents at beginning of year 287,166 20,255 70,936 Cash and cash equivalents at end of year $ 132,635 $ 287,166 $ 20,255 73 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2021, 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, 2021, 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, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the allowance for credit losses as of January 1, 2020 due to the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (ASC Topic 326). As explained below, auditing the Company’s allowance for credit losses on loans was a critical audit matter. 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. 74 Table of Contents 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, 2021 was $12.0 million, of which $12.0 million was related to the allowance for credit losses on loans evaluated on a collective basis (the “collective ACL”). The December 31, 2021 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 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, 2022 75 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.